Invoicing Goods Higher Than Cost in Consignment:

Learning Objectives:

1. What is the accounting treatment when consignor invoices goods higher than the actual cost?

Sometimes in place of sending the goods to the consignee at cost price the consignor invoices them at higher price, the object being not to disclose to the consignee the amount of consignor’s profit. The pro-forma invoice is sent to the consignee. The real cost of the goods is not disclosed. Therefore the entries made in this case are a little different from those if the goods are sent at actual cost. The difference in entries is only in respect of goods sent on consignment and stock. When goods are invoiced at selling price, the following entries are made:

1. On sending goods at invoice price i.e., higher than cost:-

   Consignment Account     Dr.
   To Goods Sent on Consignment Account      Cr.
   

2. At the end of the year difference between the invoice price and the cost will be credited to the consignment account by debiting goods sent on consignment account. For example, if the goods costing $10,000 are invoiced at $12,000 an entry will have to be made at the end of the year for $2,000.

   Goods Sent on Consignment Account     Dr.
   To Consignment Account     Cr.

   The purpose of this entry is to show the cost of goods sent out and calculate the profit on consignment.
   

3. The stock in hand at the end of the year (unsold stock) with the consignee will be valued according to the invoice price plus the share of expenses. The usual entry is:-

   Stock on Consignment Account    Dr.
   To Consignment Account     Cr.
   

4. As the stock should not be shown at more than cost, therefore, the difference in entry No. 3 above will be calculated and the following entry will be passed:

   Consignment Account     Dr.
   To Stock Reserve Account    Cr.

In the balance sheet, the stock reserve account will appear on the asset side as reduced from the stock on the consignment account.

Example:

Rashid of city A sends 100 sewing machines on consignment to Malik of city B. The cost of each machine is $130 but the invoice price is at the rate of $160 each. Rashid spends $400 on packing and despatch. Malik receives the consignment and immediately accepts Rashid’s draft for $8000. Subsequently, Malik informs Rashid that 80 machines have been sold at $175 each. Expenses paid by Malik are; freight $600, godown rent $50, and insurance $100. Malik is entitled to a commission of 6 per cent on sales and 1-1/2 percent as del credere commission.

Give journal entries in the books of Rashid . Also prepare necessary ledger accounts:

Solution:

Journal

Consignment to City B Account

Malik

You may also be interested in other articles from “accounting for consignment” chapter:

1. Definition and Explanation of Consignment
2. Distinction/Difference Between Consignment and Sale
3. Definitions of Important Terms Used in Consignment Accounting
4. Consignment Accounting Journal Entries
5. Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
6. Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting
7. Invoicing Goods Higher Than Cost in Consignment
8. Consignment Accounting Problems, Exercises and Questions
9. Consignment Accounting Questions and Answers

Other Related Accounting Articles:

• Consignment Accounting Exercises and Problems
• Definitions of Important Terms Used in Consignment Accounting
• Definition and Explanation of Consignment
• Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
• Consignment Accounting Questions and Answers
• Distinction/Difference Between Consignment and Sale
• Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting