With the help of new and modern marketing tools, businesses can now expand their sales and move beyond geographical boundaries. Firms use consignment transactions for the delivery of their products and accounting for such transactions is done in a standard manner. Let’s first understand the meaning of consignment.
The act of consignment is to hand over goods belonging to one person to another person without transferring the ownership of the goods. Consignment sale meaning in the context of goods relates to sending of goods for sale. This term is used in the shipping or transport of goods.
In the act of consignment, a person/firm sends goods to another person/firm for selling them on behalf of the former. The owner of the goods transfers only the possession of the goods in a consignment and retains the ownership over them.
The purpose of a consignment is to facilitate the delivery or transport of goods. The person who is responsible for keeping and transporting the goods of a party receives a commission for his services. He assumes the responsibilities and risks associated with the control and possession of goods.
There are two parties to a consignment transaction:
Consignor or Principal
Consignee or Agent
Let’s understand the consignor and consignee meaning in detail.
Meaning of Consignor or Principal- As per the consignor definition, the consignor is a party that sends the goods. He holds the ownership of the goods.
Meaning of Consignee or Agent: Consignee is the party that receives the goods. He does not have the ownership of the goods but has control and possession of goods.
The relationship between the consignor and consignee is that of a principal and agent. The consignor acts as the principal for the consignee, who becomes his agent.
Let’s understand the step by step procedure of consignment:
The first step in a consignment involves the consignor and consignee entering into an agreement of consignment.
The consignee agrees to accept the possession of goods from the consignor
Both consignor and consignee agree upon the terms of their agreement and the commission payable to the consignee.
The consignor hands over the possession of goods to the consignee along with a proforma invoice.
The proforma invoice is a document that contains details about the goods transferred.
In the process of consignment, the consignor transfers only the possession of goods and not the ownership over them.
The consignee undertakes the transport and sale of these goods under his possession
The consignor pays the commission at agreed rates to the consignee for his services
The consignee sends a statement called Account Sales to the consignor. It contains:
Details of the sales made by the consignee
Details of the expenses incurred by him
Commission payable to him
The consignee bears all the sales expenses and later recovers them from the consignor. The terms of agreement regarding the expenses can be changed by the parties if they want.
Every consignment is allotted a unique consignment number that helps to track the consignment and to keep a record of all the consignment transactions.
A consignment account is an account for goods that are sent to a person or company. This person or company are not the owners of the goods consigned to them but are responsible for selling them or returning the unsold goods to the owner. The value of the goods that are sent on consignment is charged to the consignment account. This account is prepared to ascertain the profit or loss of the consignor on a specific consignment.
A consignment store definition states that it is a shop selling second-hand items on behalf of the original owner, who receives a percentage of the selling price.
Q1. Keeping in mind the meaning of Consignment and Distinction with Sales, list the Key Principles of a Consignment Transaction.
Ans. The basic principles of a consignment transaction are:
There are two parties in a consignment: consignor and consignee.
The consignor hands over the possession of his goods to the consignee.
Ownership of the goods remains with the consignor until they are sold
The consignee is responsible for taking care of the goods consigned to him
The transport and sale of goods expenses are borne by the consignees unless agreed otherwise in the agreement
The consignor pays the consignee a commission for his services
Q2. Define Consignment and State the difference between the Sale of Goods and Consignment?
Ans. In accounting, consignment means the handing over of goods by the consignor to the consignee, for the purpose of sale. The difference between consignment and sale are:
Ownership Stays with the consignor till the goods are sold
Ownership is transferred to the buyer as soon as the sale is complete
Consignor-consignee have a principal-agent relationship
The relationship between the buyer and seller is that of a debtor-creditor
Unsold goods are returned to the consignor
Ownership of the goods is transferred on sale so the buyer cannot return the goods to the seller unless he agrees to the same.
Expenses incurred by the consignee are borne by the consignor unless agreed otherwise
After the goods are sold they are the buyer’s responsibility and any expenses incurred after that are not borne by the seller