Consignor’s Accounting: Recording Transactions in the Consignment Process

When a manufacturer hands over goods to an agent to sell on their behalf, the goods change location but not ownership. This arrangement, known as consignment, creates an accounting puzzle: how do you record a transaction that looks like a sale but legally isn’t one yet? The consignor, the party sending the goods, solves this by opening a dedicated set of accounts that track the entire journey of the goods from dispatch to final sale. Understanding these accounts is one of the most practical skills you’ll build in a financial accounting course, since it shows up repeatedly in exams and in real distribution businesses.

Why consignment needs its own accounting treatment 🔗

In an ordinary sale, goods leave the seller’s premises and ownership transfers immediately, so revenue is recognised on the spot. Consignment works differently. The ownership and the risk in the goods stay with the consignor even after the goods physically reach the consignee, and revenue is only recognised once the consignee actually sells the goods to a customer. Recording this transaction like a normal sale would overstate revenue and misstate inventory, so the consignor maintains a separate set of accounts purely to track this one arrangement.

This separation also has a practical benefit: it lets the consignor calculate the exact profit or loss earned from each consignee or each consignment, rather than lumping it into general trading figures.

The three accounts every consignor maintains 🔗

Three ledger accounts work together in the consignor’s books to capture every stage of the transaction.

Consignment account 🔗

This is a nominal account opened separately for each consignment. Its job is to calculate the profit or loss on that specific batch of goods. The debit side records the cost of goods sent along with all expenses, while the credit side records the sales made and the value of any unsold stock still lying with the consignee at the end of the period.

Goods sent on consignment account 🔗

This account mirrors the role of a sales account but stays outside the regular trading account until the period closes. It is credited when goods are dispatched and later closed off by transferring its balance to the trading account, so the value of goods sent out doesn’t get counted twice in the consignor’s overall stock figures.

Consignee’s account 🔗

Consignee’s account is a personal account that tracks how much money the consignee owes the consignor at any point. It is debited when the consignee sells goods on the consignor’s behalf, and credited for expenses the consignee has paid, commission earned, advances sent, and any amount actually remitted.

Recording the transactions step by step 🔗

Here’s how the consignor’s books capture each stage of a typical consignment, from dispatch to final settlement.

Notice the pattern: nearly every entry passes through the Consignment account, which is exactly why it becomes the summary account showing whether the whole arrangement was profitable.

Direct expenses versus indirect expenses 🔗

Not every expense is treated the same way when it comes to valuing unsold stock. The expenses of the consignor are always included in full, but only the consignee’s non-recurring expenses incurred before the goods reach his godown, such as freight, carriage, or unloading charges, are added. Recurring costs like godown rent, insurance of the warehouse, or selling expenses paid by the consignee are excluded from this calculation because they relate to holding or selling the stock, not bringing it to a saleable location. This distinction, confirmed by accounting guidance on stock valuation, is one of the most common places students lose marks, so it’s worth memorising carefully.

Valuing the stock still lying with the consignee 🔗

At the close of an accounting period, some goods usually remain unsold. Since the consignor still owns them, this unsold stock must appear as an asset in the consignor’s books, valued the same way closing stock is valued in a trading account. The formula adds the proportionate cost of goods to the proportionate direct expenses of both parties, and the resulting figure is compared against market price, with the lower of the two used for the books.

For example, if 1,000 units costing ₹500 each were consigned, with the consignor paying ₹20,000 in freight and insurance, the total cost base becomes ₹5,20,000, or ₹520 per unit. If 200 units remain unsold, the closing stock is valued at ₹1,04,000, and this amount is debited to a Consignment Stock account and credited to the Consignment account, effectively removing it from the “cost” side of the arrangement until it’s actually sold.

Del credere commission and bad debts 🔗

Consignees sometimes receive an additional payment called del credere commission, in exchange for guaranteeing that customer debts will be collected. When this commission is paid, any bad debt arising from credit sales becomes the consignee’s problem, and no entry for it appears in the consignor’s books. Without del credere commission, the loss from unpaid customer debts is borne by the consignor and is debited to the Consignment account. This single clause in a consignment agreement can significantly change who absorbs the risk of credit sales, so it’s a detail worth checking in every problem.

Arriving at the final profit or loss 🔗

Once every dispatch, expense, sale, and remittance has been posted, the Consignment account is balanced. The debit side holds the cost of goods and every expense, direct or indirect, along with commission payable to the consignee. The credit side holds sales proceeds and the value of unsold stock. The difference between the two sides represents the profit or loss on that consignment, which is then transferred to the consignor’s profit and loss account, just like any other nominal account is closed at year end. Separate accounting of this kind gives businesses a much clearer picture of whether a particular consignee or route is worth continuing, something independent tracking of consignment transactions is specifically designed to reveal.

A quick worked example 🔗

Suppose a trader consigns goods costing ₹2,00,000 to an agent and pays ₹10,000 in freight. The agent sells goods worth ₹1,80,000, incurs ₹5,000 in local cartage, earns a commission of ₹9,000, and remits the balance. The Consignment account would be debited with ₹2,00,000 (goods), ₹10,000 (freight), ₹5,000 (cartage), and ₹9,000 (commission), totalling ₹2,24,000. It would be credited with ₹1,80,000 (sales) plus the value of unsold stock. If the unsold stock works out to ₹43,000 after including proportionate expenses, the credit side totals ₹2,23,000, giving a small loss of ₹1,000 on the consignment. Working through numbers like these by hand, rather than just memorising the formulas, is the fastest way to get comfortable with this topic before an exam.

Consignee’s account, in the meantime, would show ₹1,80,000 debited for sales, and ₹5,000, ₹9,000, and the remittance credited, leaving a nil balance once the cash is received, since the personal account is meant to settle down to zero once all dues are cleared.

What do you think? 🔗

What do you think? If a consignor sends goods at invoice price instead of cost price, how do you think this would change the entries in the Goods Sent on Consignment account? And why might a consignor prefer paying del credere commission even though it adds to the consignee’s cost?

References

1. https://live.icai.org/bos/vcc-2nd-batch-recorded-lectures/pdf/Chap%206_unit%203_Consignment.pdf
2. https://www.cbsesamplepapers.info/accounting/consignment-accounting-valuation-of-unsold-stock
3. https://www.double-entry-bookkeeping.com/partnership/consignment-accounting/
4. https://www.wallstreetmojo.com/consignment-accounting/
5. https://www.accountingformanagement.org/journal-entries-in-the-books-of-consignee/