Consignment Accounting: Key Accounts, Entries & Treatment for Beginners

Meaning of Consignment

Consignment is a business arrangement in which goods are sent by the owner (called the Consignor) to an agent (called the Consignee) for the purpose of selling them on behalf of the owner. The goods are sold at the risk of the consignor, and the consignee receives a commission for the services rendered. The term “Consign” means to send or hand over goods to another person for care, custody, or sale.

When goods are sent by a manufacturer or trader to an agent to be sold on a commission basis and at the consignor’s risk, the transaction is called Consignment. For the sender, it is an Outward Consignment, and for the receiver, it is an Inward Consignment. Thus, consignment refers to sending goods by a principal to an agent who sells them on the principal’s behalf in return for an agreed commission.

Key Terms

1. Consignor - The person who sends the goods for sale on his behalf and at his own risk.
2. Consignee - The agent who receives the goods, sells them on behalf of the consignor, and earns a commission.

Consignment Account

A Consignment Account is similar to a Profit & Loss Account for the consignment transactions.

1. Expenses related to consignment → Debited
2. Revenues/Sales → Credited

The difference shows Profit or Loss on Consignment.

Objectives of Consignment

1. To expand market reach.
2. To promote sales through local agents.
3. To earn higher profits.
4. To achieve business growth and expansion.
5. To increase overall profitability through wider distribution.

Features of Consignment

1. The relationship between consignor and consignee is that of principal and agent.
2. The consignee sells goods on behalf of and at the risk of the consignor and receives a commission.
3. The consignee is not responsible for loss, damage, or destruction of goods unless due to negligence.
4. Consignment is not a sale; only possession of goods is transferred, not ownership.
5. Goods are sent with the objective of selling them at a profit.
6. Ownership of goods remains with the consignor until they are sold.
7. The consignee merely undertakes to sell the goods; he does not purchase them.
8. The consignor cannot demand payment until the goods are sold and proceeds are realized.
9. The consignee deducts his commission from the sale proceeds.
10. Expenses incurred by the consignee for selling goods are reimbursed by the consignor.
11. Unsold stock with the consignee continues to belong to the consignor.
12. Profit or loss on sale belongs entirely to the consignor.
13. The consignor prepares a Proforma Invoice while sending goods.
14. The consignor may ask for an advance from the consignee before dispatching goods.
15. The consignee periodically sends an Account Sales statement showing goods sold, expenses incurred, and amount due.

Difference Between Consignment and Sale

Basis	Sale	Consignment
1. Transfer of Ownership	Ownership of goods transfers from the seller to the buyer.	Ownership remains with the consignor; only possession is transferred to the consignee.
2. Return of Goods	Goods once sold cannot be returned by the buyer (except if defective or not as per specifications).	Unsold goods can be returned by the consignee to the consignor.
3. Relationship Between Parties	Relationship is that of seller and buyer (creditor and debtor).	Relationship is that of principal and agent.
4. Risk of Goods	Risk is borne by the buyer after the sale.	Risk remains with the consignor until the goods are sold.
5. Expenses	Buyer bears all expenses incurred after taking delivery.	Expenses incurred by the consignee for receiving and safeguarding the goods are borne by the consignor.
6. Stock Treatment	Stock with the buyer belongs to the buyer.	Unsold stock with the consignee belongs to the consignor and appears as consignment stock in consignor’s books.
7. Governing Law	Governed by the Sale of Goods Act, 1930.	Governed by the Indian Contract Act, 1872 (not 1932).
8. Transfer of Property	Property in goods passes to the buyer on sale.	Property in goods does not pass to the consignee.
9. Commission	Buyer is not entitled to any commission.	Consignee receives commission for the services rendered.
10. Purpose	Sale is made with the intention of earning revenue by selling goods outright.	Consignment is made to expand market reach through agents and sell goods on behalf of the consignor.

Important Terms in Consignment

1. Proforma Invoice

A Proforma Invoice is prepared by the consignor when goods are sent on consignment. Since consignment is not a sale, a regular sales invoice is not prepared. Instead, a proforma invoice is sent to the consignee along with the goods.

Purpose of Proforma Invoice

• To provide details of quantity, quality, and price of goods consigned.
• To inform the consignee about expenses incurred, mode of transportation, and minimum sale price at which goods should be sold.
• To act as a forwarding statement, not a sales invoice.
• It serves as a guideline document for the consignee.

2. Account Sales

An Account Sales is a statement prepared periodically by the consignee and sent to the consignor. Contents of Account Sales. It contains:

• Quantity and description of goods sold
• Sale proceeds realized
• Expenses incurred by the consignee
• Commission due to the consignee
• Balance amount payable to the consignor
• Less: Any advance given earlier by the consignee

Purpose - To give a complete report of:

• How much goods were sold
• At what price
• What expenses were incurred
• How much commission is earned
• How much is due to the consignor after all deductions

3. Commission

Commission is the remuneration paid to the consignee by the consignor for selling the goods. It is usually a fixed percentage of gross sales, unless stated otherwise.

Types of Commission

A. Ordinary Commission

• A normal commission paid as a percentage of gross sale proceeds.
• The consignee is not responsible for bad debts while receiving only ordinary commission.
• This is the default commission if no other type is specified.

B. Special Commission

Special commission is paid over and above the ordinary commission. It includes:

a. Overriding Commission

Paid for:

• Introducing a new product
• Extra efforts made by the consignee
• Supervising other agents
• Selling goods above the invoice/ minimum price fixed by the consignor

This encourages the consignee to achieve higher sales or higher selling prices.

b. Del Credere Commission

• Paid to make the consignee responsible for credit sales and bad debts.
• Acts as insurance against the risk of bad debts for the consignor.
• Unless otherwise agreed, it is calculated on total sales, but sometimes only on credit sales.
• By accepting Del Credere Commission, the consignee agrees to bear any loss from bad debts.

4. Advance by the Consignee

Sometimes, the consignor may ask the consignee to provide an advance as security.

This may be paid as:

• Cash
• Bank transfer
• Bank draft
• Bill of exchange

The advance is adjusted against the consignee’s subsequent remittances after goods are sold.

5. Expenses on Consignment

Expenses may be incurred by either party:

A. Expenses by Consignor

These may include:

• Packing charges
• Freight
• Insurance
• Loading/unloading before dispatch

B. Expenses by Consignee

These include expenses related to:

• Receiving the goods
• Unloading
• Storage and godown charges
• Marketing and selling expenses

All such expenses (unless of a personal nature) are reimbursed by the consignor.

Accounting Treatment in Consignment

There are two parties involved in a consignment transaction:

1. Consignor and 
2. Consignee.

Each maintains specific accounts in their own books.

A. Accounts Maintained in the Books of the Consignor

1. Consignment Account

• Nominal account prepared to ascertain profit or loss on consignment.
• All expenses and losses are debited.
• All incomes and credits (e.g., sales value reported by consignee) are credited.

2. Goods Sent on Consignment Account

• Real account used to record the value of goods dispatched to the consignee.
• It is usually credited when goods are sent.
• At the end of the period, it is closed by transferring its balance to the Trading Account.

3. Consignee’s Account

• Personal account of the consignee.
• Debited when:
• Goods are sold and proceeds are due
• Expenses are incurred by the consignee
• Commission becomes payable
• Credited when:
• Cash/Bank remittance is received from the consignee
• Advance received earlier is adjusted

4. Stock on Consignment Account

• Shows the value of unsold stock lying with the consignee.
• Recorded at cost or invoice price, depending on method used.
• Appears as an asset in the consignor’s Balance Sheet.

B. Accounts Maintained in the Books of the Consignee

1. Consignor’s Account

• Personal account of the consignor.
• Credited with:
• Sale proceeds of goods
• Debited with:
• Expenses incurred on behalf of consignor
• Commission due to the consignee
• Remittances made to the consignor
• The balance represents the amount payable to the consignor.

2. Commission Account

• Nominal account.
• Credited with:
• Ordinary commission
• Overriding commission
• Del Credere commission (if applicable)
• Closed to Profit & Loss Account at the end of the period.

Account opened in the books of consignor 

Consignment account 

To ascertain Net profit or Loss. Consignment account is a nominal account. Prepared just like trading and profit & loss account. Debited with amount of goods sent and expenses incurred. Credited with amount of sale and stock with consignee at the end.

• If debit side > credit side = Loss
• If credit side > debit side = Profit

Which is to be transferred to profit and loss account.

Consignment Account

Particulars	Amount	Particulars	Amount
Good Sent		Sale
Expense Incurred		Stock with consignee at end
Profit (Bal. Fig)		Loss (Bal. Fig)

Account opened in the books of consignor

Goods sent on Consignment  it is a Real Account. 

• It is credited  - when goods are sent on consignment. 
• It is debited  - when goods returned by the consignee. 

The account is closed by transferring its balance to the credit side of trading account.

Good Sent on Consignment Account

Particulars	Amount	Particulars	Amount
Good Returned by Consignee		Goods sent on Consignment
To Trading A/c (Transfer)

Consignee’s Account

Its personal account in nature. It represents the amount due by or due to the consignee. Debited for gross sale proceeds. Credited for consignee’s expense, commission payable to him. Amount received in advance or in final settlement of the balance due.

Consignee’s Account

Particulars	Amount	Particulars	Amount
Gross Sale		Consignee’s Expense
		Commission Payable
		Final Settlement of Amount Due

Stock on Consignment Account

It is real account in nature. Debited with the value of unsold goods lying with the consignee at the end of accounting year and carried forward to the next accounting period.

Stock on Consignment Account

Particulars	Amount	Particulars	Amount
Value of unsold goods

Account opened in the books of Consignee

1. Consignor’s Account – It shows the sale, expenses of consignor and due to consignor.
2. Commission Account – It is Nominal account in nature. Thus, commission received being income by the consignee is credited.

Consignor’s Account

Particulars	Amount	Particulars	Amount
Expense of Consignor		Sales

Commission Account

Particulars	Amount	Particulars	Amount
		Commission Received Account

Journal Entries in the Books of Consignor and Consignee

A. Journal Entries in the Books of the Consignor

1. For Goods Sent on Consignment

Consignment Account Dr.

      To Goods Sent on Consignment Account

2. For Advance/Remittance Received from Consignee

Bank Account Dr.

      To Consignee Account

3. Expenses Incurred by Consignor

Consignment Account Dr.

      To Cash/Bank Account

4. Expenses Incurred by Consignee (to be reimbursed)

Consignment Account Dr.

      To Consignee Account

5. Consignee’s Commission

Consignment Account Dr.

      To Consignee Account

(Correct entry — the original text had a mistake “To Consignment Account”)

6. Goods Sold by Consignee

Consignee Account Dr.

      To Consignment Account

7. Goods Returned by Consignee

Goods Sent on Consignment Account Dr.

      To Consignment Account

8. Opening Stock on Consignment

Consignment Account Dr.

      To Stock on Consignment Account

9. Closing Stock on Consignment

Stock on Consignment Account Dr.

      To Consignment Account

10. For Profit on Consignment

Consignment Account Dr.

      To Profit & Loss Account

11. For Loss on Consignment

Profit & Loss Account Dr.

      To Consignment Account

12. Final Settlement — Amount Received from Consignee

Bank Account Dr.

      To Consignee Account

B. Journal Entries in the Books of the Consignee

1. For Receiving Goods

No Entry

(Ownership not transferred)

2. For Advance Sent to Consignor

Consignor Account Dr.

      To Bank Account

3. Expenses Incurred by Consignor

No Entry

4. Expenses Incurred by Consignee (on behalf of consignor)

Consignor Account Dr.

      To Cash/Bank Account

5. Commission Earned by Consignee

Consignor Account Dr.

      To Commission Account

6. Goods Sold by Consignee

• For Cash Sales

Cash Account Dr.

      To Consignor Account

• For Credit Sales

Consignment Debtors Account Dr.

      To Consignor Account

7. Goods Returned to Consignor

No Entry

8. Stock on Consignment (Opening/Closing)

No Entry

9. Profit or Loss on Consignment

No Entry

(Profit/Loss belongs to consignor)

10. Settlement of Consignor Account

Consignor Account Dr.

      To Bank Account

Difference Between Proforma Invoice and Invoice

Proforma Invoice	Invoice
1. A Proforma Invoice is sent to the prospective customer or consignee.	1. An Invoice is sent to the buyer.
2. It is sent before the goods are dispatched.	2. It is sent after the goods are dispatched.
3. A Proforma Invoice does not involve an actual sale.	3. An Invoice is issued on actual sale.
4. It is sent if required.	4. It is sent regularly for every sale.
5. The prospect or consignee is not required to make payment for a Proforma Invoice.	5. The buyer must pay the amount stated in the Invoice.

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