Consignment Accounts: Consignor and Consignee, Valuation of Stock, Commission and Abnormal Loss Questions

Question 1

Define consignment.

Accepted Answer

**Consignment** is sending goods by the **consignor** to the **consignee** (agent) for sale on behalf of the consignor, where ownership remains with consignor until sale.

Question 2

Who is a consignor?

Accepted Answer

**Consignor** is the owner of goods who sends goods to consignee for sale on consignment.

Question 3

Who is a consignee?

Accepted Answer

**Consignee** is the agent who receives goods from consignor and sells them on behalf of consignor for a commission.

Question 4

What is a proforma invoice?

Accepted Answer

**Proforma invoice** is an information statement sent by consignor to consignee showing details of goods dispatched; it is not a sale invoice.

Question 5

What is account sales?

Accepted Answer

**Account sales** is a statement sent by consignee to consignor showing sales, expenses, commission and closing stock/loss details of consignment.

Question 6

What is del credere commission?

Accepted Answer

**Del credere commission** is an extra commission given to consignee for bearing the risk of **bad debts** on credit sales.

Question 7

Differentiate consignment and sale (any three points) with a table.

Accepted Answer

### **Consignment vs Sale**

- Consignment is **principal–agent** relationship; sale is **buyer–seller** relationship.
- In consignment, **ownership** remains with consignor; in sale, ownership transfers to buyer.
- In consignment, consignor bears **risk of loss**; in sale, buyer bears risk after purchase.

Table:

| Basis | Consignment | Sale |
|---|---|---|
| Relationship | principal–agent | buyer–seller |
| Ownership | with consignor | transferred |
| Income to middle party | commission | profit margin |

Thus, consignment is agency-based selling, not a sale to consignee.

Question 8

Explain types of commission (ordinary, del credere, overriding) (any three points) with a mini table.

Accepted Answer

Types of commission:

- **Ordinary commission**: basic commission for selling goods.
- **Del credere commission**: extra commission for taking risk of **bad debts** on credit sales.
- **Overriding commission**: extra commission for additional efforts / higher sales price / special promotion.

Mini table:

| Commission | Meaning |
|---|---|
| Ordinary | basic selling commission |
| Del credere | bad-debt risk on credit sales |
| Overriding | extra incentive for performance |

Hence, commission varies as per agreement and responsibility of consignee.

Question 9

Explain account sales: contents and importance (any three points).

Accepted Answer

Account sales is the statement sent by consignee to consignor.

Contents/importance (any three):
- shows **cash sales and credit sales** made by consignee.
- shows **expenses** incurred by consignee (with details).
- shows **commission** due to consignee (ordinary/del credere/overriding).
- provides information about **closing stock** and **loss**, if any.

Thus, account sales is the main basis for preparing consignment accounts and finding consignment profit/loss.

Question 10

Explain valuation of unsold stock on consignment (any three points) with a table of inclusions.

Accepted Answer

Unsold consignment stock belongs to consignor and is valued at **cost plus proportionate non‑recurring expenses**.

Key points:
- include **cost of goods** and proportionate **non‑recurring expenses** (freight, insurance, customs, etc.).
- exclude **recurring/selling expenses** (rent, advertisement, delivery).
- if normal loss exists, non‑recurring expenses are spread over **effective units**.

Inclusion table:

| Item | Include in stock value? |
|---|---|
| Cost of goods | **Yes** |
| Non‑recurring expenses | **Yes** |
| Recurring selling expenses | **No** |

Thus, correct stock valuation is crucial for correct consignment profit.

Question 11

Differentiate normal loss and abnormal loss on consignment (any three points) with a table.

Accepted Answer

### **Normal Loss vs Abnormal Loss**

- **Normal loss** is inherent/unavoidable (leakage, evaporation); abnormal loss is unexpected (fire, theft, accident).
- Normal loss is generally **not valued separately**; abnormal loss is **valued separately** at cost + proportionate non‑recurring expenses.
- Normal loss increases cost per unit of good units; abnormal loss is shown separately and may be claimable from insurance.

Table:

| Basis | Normal loss | Abnormal loss |
|---|---|---|
| Nature | inherent | accidental/unexpected |
| Valuation | not separate | separate valuation |
| Treatment | spreads cost | transferred to Abnormal Loss A/c |

Thus, classification of loss impacts valuation and profit calculation.

Question 12

Differentiate recurring and non-recurring expenses in consignment (any three points) with examples and a mini table.

Accepted Answer

Recurring and non‑recurring expenses differ mainly by **purpose** and **stock valuation** treatment.

- **Non‑recurring expenses** are incurred to bring goods to consignee’s place / make them saleable (freight, carriage inward, insurance, customs, octroi, loading/unloading). They are **included** in stock valuation.
- **Recurring expenses** are selling/period expenses after goods reach destination (godown rent, advertisement, salesmen salary, delivery). They are **not included** in stock valuation.
- Non‑recurring expenses are apportioned between sold goods and closing stock; recurring expenses are charged for the period.

Mini table:

| Expense type | Examples | Stock valuation? |
|---|---|---|
| Non‑recurring | freight, insurance | **Yes** |
| Recurring | rent, advertisement | **No** |

Thus, correct classification of expenses ensures correct stock value and correct consignment profit.

Question 13

Explain consignment account and show the basic format and flow of calculation (exam-style).

Accepted Answer

### **Consignment Account — Exam-Style**

**Consignment A/c** is prepared in the books of consignor to find profit or loss on consignment.

Basic structure:
- **Debit side**: cost of goods sent + non‑recurring expenses + consignee’s expenses (as per agreement) + abnormal loss.
- **Credit side**: sales (cash + credit) + closing stock.

Profit/Loss:
- Excess of credit side over debit side = **profit on consignment**.
- Excess of debit side over credit side = loss.

Flow:

```text
Goods sent + expenses → Determine sales → Less: commission → Value closing stock → Adjust losses → Find consignment profit/loss
```

**Conclusion:** Consignment account summarises consignment results and helps compute correct profit by separating expenses, commission, stock and losses.

Question 14

Valuation of closing stock on consignment with a worked example (exam-style) and table.

Accepted Answer

### **Valuation of Closing Stock on Consignment — Exam-Style**

Rule: Closing stock is valued at **cost + proportionate non‑recurring expenses**.

Worked example:
- Goods sent: 100 units @ Rs. 50 = Rs. 5,000
- Non‑recurring expenses (freight, insurance etc.) = Rs. 1,000
- Units sold = 80 units → closing stock = 20 units

Cost per unit = 50
Non‑recurring expense per unit = 1,000 / 100 = 10
Stock value per unit = 50 + 10 = 60

Closing stock value = 20 × 60 = **Rs. 1,200**

Table:

| Component | Per unit (Rs.) |
|---|---:|
| Cost | 50 |
| Non‑recurring exp. | 10 |
| Stock value | **60** |

**Conclusion:** Only non‑recurring expenses are added to cost for stock valuation; recurring selling expenses are excluded.

Question 15

Explain abnormal loss: valuation, accounting treatment and insurance claim (exam-style) with a flowchart.

Accepted Answer

### **Abnormal Loss on Consignment — Exam-Style**

**Abnormal loss** is unexpected loss (fire, theft, accident) and must be valued separately.

**Valuation:**
- value = cost of lost goods + proportionate **non‑recurring expenses** up to the point of loss.

**Accounting treatment (in consignor’s books):**
- Abnormal Loss A/c Dr
  To Consignment A/c

If insurance claim is received:
- Bank/Insurance Company A/c Dr
  To Abnormal Loss A/c

Balance (unrecovered loss) is transferred to P&L.

Flowchart:

```text
Abnormal loss occurs → Value loss (cost + non‑recurring exp.) → Transfer to Abnormal Loss A/c → Adjust insurance claim → Transfer balance to P&L
```

**Conclusion:** Separate valuation and proper claim adjustment ensures correct consignment profit and correct reporting of loss.

Basis	Consignment	Sale
Relationship	principal–agent	buyer–seller
Ownership	with consignor	transferred
Income to middle party	commission	profit margin

Consignment Accounts: Consignor and Consignee, Valuation of Stock, Commission and Abnormal Loss

Consignment vs Sale

8 more questions to unlock