Proforma Invoice and Account Sales

Because a consignment is not a sale, the consignor cannot send the consignee an ordinary invoice demanding payment — the consignee has not bought anything. Instead, the consignor sends a document called a Proforma Invoice along with (or just before) the goods. A Proforma Invoice looks like an ordinary invoice in format — it lists the quantity, description and a price for each item — but it creates NO debtor-creditor relationship between consignor and consignee at all. Its real purposes are to inform the consignee exactly what has been sent and at what value, to give the consignee a suggested minimum selling price (or a price below which the consignee should not normally sell without checking back), and to fix a value for insuring the goods in transit or in the consignee's godown.

The price shown on a Proforma Invoice is often deliberately set HIGHER than the consignor's actual cost — this is called loading, and the extra amount is usually loading to keep the actual cost, and hence the actual profit margin, confidential from the consignee. A consignee who only ever sees the loaded invoice price cannot work out the consignor's true profit simply by comparing it with the eventual sale price. When goods are invoiced above cost, the loading must always be removed again while valuing unsold stock or working out the consignor's own genuine profit, since the Proforma Invoice price is never the real cost figure used for accounting purposes.

At the other end of the consignment, once some or all of the goods have been sold, the consignee sends the consignor a periodic statement called an Account Sales. This is the consignee's formal report back to the consignor, and it typically shows: the quantity of goods received, sold and still remaining unsold (and any loss, if applicable); the gross sale proceeds realised; the expenses the consignee has personally paid on the consignor's behalf (and is entitled to recover); the consignee's own commission; and, finally, the NET amount now due to the consignor (or any advance already paid, adjusted against it). Since the consignor is not present when the goods are actually sold, it is the Account Sales — not any invoice — that tells the consignor what genuinely happened to the goods, and it is this document that the consignor uses to record sales, expenses and commission in the Consignment Account.