Accountancy · Ch 2 — Consignment Accounts
Meaning of Consignment and How It Differs from a Sale
Meaning of Consignment and How It Differs from a Sale
A trader who manufactures or deals in goods does not always sell in his own city or town. To reach buyers in a distant market, he often sends goods to an agent there, with instructions to sell them on his behalf. This despatch of goods by one person (the owner) to another person (an agent) at a different place, for the purpose of sale, is called a consignment. The person who sends the goods is the consignor, and the person to whom the goods are sent for sale is the consignee. This chapter of the TS Inter II year Accountancy syllabus builds the full set of accounting records that arise out of such an arrangement.
A consignment looks like a sale at first glance — goods physically move from one place to another — but it is fundamentally different from an outright sale, and the difference decides almost every accounting treatment that follows in this chapter.
| Basis of difference | Consignment | Sale |
|---|---|---|
| Ownership | Ownership of the goods continues with the consignor until the consignee actually sells them to a third party | Ownership passes from the seller to the buyer the moment the sale is made |
| Relationship | Consignor and consignee share a principal–agent relationship | Seller and buyer share a debtor–creditor relationship (once the sale is on credit) |
| Risk | The risk in the goods remains with the consignor till the goods are actually sold by the consignee | The risk passes to the buyer along with ownership |
| Right of return | Unsold goods can be, and normally are, returned by the consignee to the consignor | Goods once sold cannot ordinarily be returned except by mutual agreement |
| Expenses | All reasonable expenses incurred by the consignee in connection with the goods are reimbursed by the consignor | The buyer bears his own expenses after the sale; the seller has no further liability |
| Relationship document | Goods move under a proforma invoice, not a real invoice, because no sale has yet taken place | Goods move under a regular sale invoice, because a sale has actually taken place |
| Profit/Loss | Profit or loss belongs entirely to the consignor; the consignee only earns a commission | Profit or loss on the transaction belongs to the seller who made the sale |
Because ownership never passes at the point of despatch, goods sent on consignment are never treated as sales in the books of the consignor, and the recipient never treats them as a purchase in his own books either — a point this chapter returns to when we look at the consignee's books. This distinction is exactly why Telangana Intermediate commerce consignment accounts are studied as a separate chapter and not merged into ordinary trading transactions.
The despatch of goods by an owner to an agent situated at another place, for the purpose of sale on the owner's behalf and at the owner's risk.
The owner of the goods who sends them out on consignment; he continues to own the goods until they are actually sold.
The agent who receives the goods and sells them on behalf of the consignor, in return for a commission.