Principles of Financial Accounting (B.Com) 1st Sem Previous year Solved Question Paper 2022

Consignment is a business arrangement in which a person or company (consignor) sends goods to another party (consignee) for the purpose of selling those goods on behalf of the consignor. The consignee acts as an agent for the consignor and is responsible for selling the goods to customers. Once the goods are sold, the consignee remits the proceeds to the consignor after deducting a commission or any agreed-upon expenses. 

Consignment arrangements can benefit both parties. Consignors can expand their distribution network without the upfront costs and risks of traditional sales, while consignees can offer a broader range of products without the need for significant inventory investments . Managing consignment inventory can be complex, and there may be disputes over damaged goods, pricing, or sales reporting. Open communication and a well-defined consignment agreement are crucial to addressing these challenges . Consignment is commonly used in industries like fashion, art, antiques, and even automotive, where manufacturers or producers want to reach a wider customer base by leveraging the distribution 

Here are the typical journal entries in the books of both the consignor and the consignee for consignment transactions: 

Journal Entries in the Books of the Consignor: 

To Record Goods Sent on Consignment:

-Debit: Consignment Account (Asset)

-Credit: Stock (Asset)

This entry recognizes that goods have been sent to the consignee but remain the property of the consignor. 

2. To Record Expenses Incurred on Consignment: 

- Debit: Consignment Account (Asset)
- Credit: Cash or Bank (Asset) 

This entry accounts for any expenses incurred by the consignor related to the consignment, such as packing or transportation costs. 

3. To Record Commission Earned:

- Debit: Cash or Bank (Asset)
- Credit: Commission Earned (Revenue) 

This entry reflects the commission received by the consignor from the consignee on the sale of goods. 

4. To Record Unsold Goods Returned by Consignee (if applicable):
- Debit: Stock (Asset)
- Credit: Consignment Account (Asset) 

If the consignee returns any unsold goods, they are added back to the consignor’s stock. 

Journal Entries in the Books of the Consignee: 

1. To Record Goods Received on Consignment:
- Debit: Consignment Stock (Asset)
- Credit: Consignment Liability (Liability) 

This entry recognizes that goods have been received on consignment and creates a liability for the consignee until they are sold. 

2. To Record Expenses Incurred on Consignment:
- Debit: Consignment Expense (Expense) 
- Credit: Cash or Bank (Asset) 

This entry accounts for any expenses incurred by the consignee related to the consignment, such as storage or advertising costs. 

3. To Record Sale of Goods:

- Debit: Consignment Liability (Liability)
- Credit: Sales (Revenue) 

This entry reflects the sale of goods from the consignee’s books, reducing the liability and recognizing revenue. 

4. To Record Commission Payable to Consignor:
- Debit: Consignment Expense (Expense)
- Credit: Cash or Bank (Asset)

This entry accounts for the commission payable to the consignor on the sale of goods. 

These journal entries ensure that both the consignor and consignee accurately record their respective roles and financial transactions related to the consignment arrangement. The consignor recognizes the goods sent and any income received, while the consignee records the goods received, expenses incurred, and sales made on behalf of the consignor.