Accounting for Consignment Sales

Consignment sales are transactions where goods are sent by one party (consignor) to another (consignee) for the purpose of selling them on behalf of the consignor. In this scenario, A sends goods worth 50000 to B for sales with a commission of 5%. The following are the necessary accounts that need to be prepared in the books of A.

1. Consignment Account

Consignment Account is a nominal account that is used to record all transactions related to the consignment. It is debited with the cost of goods sent on consignment, freight, and insurance expenses incurred by the consignor. In this case, A will debit the Consignment Account with the following:

- Cost of goods sent on consignment: 50000
- Freight expenses: 1500
- Insurance expenses: 500

2. Commission Account

Commission Account is a nominal account that is used to record the commission earned by the consignor. It is credited with the commission earned on the sale of goods. In this case, A will credit the Commission Account with 5% of the sale price, which is 3000 (5% of 60000).

3. Cash/Bank Account

Cash/Bank Account is a real account that is used to record all cash/bank transactions. In this case, A will receive a draft from B after deducting his expenses and commission. A will debit the Cash/Bank Account with the amount received through the draft.

4. Expense Accounts

Expense Accounts are nominal accounts that are used to record all expenses incurred by the consignor. In this case, A will debit the following expense accounts:

- Freight expenses: 1500
- Insurance expenses: 500

Journal Entry:

The following journal entry will be passed in the books of A:

Cash / Bank Account ……….Dr. 28,000
To Consignment Account ………… 50,000
To Freight Account ……………..1,500
To Insurance Account …………….500
(Being goods sent on consignment)

Commission Account ……………..Dr. 3,000
To Consignment Account ……………3,000
(Being commission earned on sales)

Unloading Expenses Account ………Dr. 500
Rent Account …………………………Dr. 500
To Cash / Bank Account …………………1,000
(Being expenses incurred by the consignee)

Conclusion:

In conclusion, the above accounts will help in recording all transactions related to consignment sales in the books of A. This will help in ascertaining the profit or loss on consignment sales and also in settling the accounts with the consignee.