2021 Jan Question on Consignment

Introduction:
In the field of accounting, consignment refers to the process of sending goods from one person or entity (consignor) to another person or entity (consignee) for the purpose of sale. The consignee sells the goods on behalf of the consignor and earns a commission for the services rendered. It is important to understand the accounting treatment of consignment transactions to accurately record and report the financial transactions.

Key Points:
- Consignor: The person or entity that sends the goods on consignment.
- Consignee: The person or entity that receives the goods on consignment and sells them.
- Consignment Agreement: A legal document that outlines the terms and conditions of the consignment arrangement.
- Consignment Stock: The goods sent by the consignor to the consignee for sale.
- Consignment Commission: The commission earned by the consignee for selling the goods on behalf of the consignor.

Accounting Treatment:
The accounting treatment of consignment transactions involves the following steps:

1. Recording Consignment Stock:
- The consignor records the consignment stock sent to the consignee as a transfer out of inventory in the consignment stock account.
- The consignor also creates a consignment in transit account to record the value of the goods in transit.

2. Recognizing Consignment Revenue:
- The consignee records the consignment stock received as an increase in inventory in the consignment stock account.
- The consignee also records a liability to the consignor for the value of the goods received.

3. Recording Sales and Commission:
- When the consignee sells the goods, the revenue from the sale is recorded as an increase in sales and a decrease in the consignment stock account.
- The consignee also records the commission earned as an expense and a decrease in the liability to the consignor.

4. Settlement of Accounts:
- At the end of the accounting period, the consignee prepares a consignment account to calculate the gross profit or loss on consignment sales.
- The consignee also prepares a consignment commission account to calculate the commission earned.
- The consignor prepares a consignment account to calculate the net sales and commission payable.

Conclusion:
Understanding the accounting treatment of consignment transactions is crucial for accurately recording and reporting the financial transactions. The consignor and consignee must follow the steps mentioned above to ensure proper documentation and settlement of accounts. This knowledge of consignment accounting will help in maintaining transparency and accuracy in financial reporting.