Parties to a Consignment, Proforma Invoice and Account Sales

Every consignment transaction, however large or small, is built around two documents that replace the ordinary invoice and receipt of a ready sale. A student preparing for the TSBIE Class 12 Accountancy examination should be able to explain both clearly and distinguish one from the other.

Proforma Invoice. When the consignor despatches goods, he does not raise a normal sale invoice, because no sale has occurred — the goods still belong to him. Instead, he prepares a proforma invoice, a statement that looks exactly like an invoice in form (it lists the goods, quantity, and a price) but is not a demand for payment. Its purposes are:

• to inform the consignee of the description, quantity and price of the goods sent, so that he knows the minimum price below which he should not normally sell;
• to serve as evidence for insurance and transport purposes while the goods are in transit;
• to help the consignee value the closing stock and prepare his own records, without ever creating a debtor-creditor relationship between the two parties.

The price shown on a proforma invoice may be the actual cost to the consignor, or it may be an inflated invoice price (cost plus a notional loading) fixed deliberately higher than cost so that the consignee cannot work out the consignor's true profit margin. Where an invoice price is used, the consignor must always remove the loading before preparing his own final accounts, so that stock and cost figures are not overstated — a topic that is dealt with separately once the basic pattern in this chapter is mastered.

Account Sales. After the consignee actually sells the goods (in full or in part), he sends a periodic statement back to the consignor called an account sales. This is the single most important document in the whole arrangement, because it is the consignor's only formal source of information about what actually happened to his goods. A typical account sales shows:

• the quantity of goods received and the quantity sold, with the sale price realised;
• the expenses incurred by the consignee on the consignor's behalf (freight, godown rent, insurance, cartage, etc.);
• the commission (ordinary, del credere, or over-riding, as agreed) earned by the consignee; …