Valuation of Unsold (Closing) Stock

At the close of the accounting period, any goods still lying unsold with the consignee must be valued and brought into the consignor's books, exactly as closing stock is brought into any ordinary trading account, following the rule of valuing stock at cost or net realisable value, whichever is lower. On a straightforward consignment, cost is almost always the lower figure, so the golden rule for this chapter becomes:

Value of unsold stock = Proportionate cost of the unsold units + Proportionate share of every direct expense (of both the consignor and the consignee) attributable to those unsold units.

The word "proportionate" is doing the real work here: every direct expense — the consignor's freight and insurance, and the consignee's clearing/unloading charges — was originally incurred for the entire consignment, so it must be spread over the entire quantity consigned (or the quantity actually received, if part of it was lost before reaching the consignee) before the share belonging to the unsold portion is picked out. Recurring/indirect expenses of the consignee — godown rent, insurance-in-godown, advertisement — are, as explained above, left out of this calculation altogether; they belong entirely to the period's Consignment Account and never to the stock figure. …