Key Terms in Consignment: Proforma Invoice, Account Sales, and More

Consignment accounting comes with its own vocabulary, and if you skip past these terms, the journal entries and ledger postings will feel like guesswork. Before a single unit is sold, the consignor and consignee exchange specific documents and agree on specific charges. Getting comfortable with terms like proforma invoice, account sales, and the different types of commission makes every consignment problem in your textbook far easier to solve. Let’s break each one down with examples you’ll actually remember.

The proforma invoice: informing the consignee 🔗

When a consignor dispatches goods to a consignee, no sale has taken place yet. Ownership still rests with the consignor. So instead of a regular invoice, the consignor prepares a proforma invoice, a statement listing the quantity, quality, and price of the goods sent, along with the consignor’s expenses and any terms of the arrangement. This document is not legally binding and does not create a payment obligation, since it merely informs the consignee about what has been sent and its expected value, as explained in this ICAI study note on consignment accounting.

The price mentioned in this document is often called the “proforma invoice price,” and it usually includes a markup over cost so that the consignee doesn’t know the consignor’s actual profit margin. For example, if a garment manufacturer in Surat sends 1,000 kurtas to a dealer in Jaipur, the proforma invoice would list every piece with its assigned price and packing details, even though no money has changed hands yet.

Why it matters for accounting 🔗

The proforma invoice becomes the reference point for valuing goods sent on consignment in the consignor’s books. It also helps calculate the value of unsold stock at the end of an accounting period, since the closing stock is usually valued using the same price basis unless the actual cost is separately known.

Account sales: the consignee’s report back 🔗

Once goods start selling, the consignee has a duty to report back. This report is called the account sales, a periodic statement sent by the consignee to the consignor. It includes details of goods sold, the sale price realised, expenses incurred on the consignor’s behalf, the commission earned, any advance already paid, and the final balance due. Unlike a regular sales invoice exchanged between a buyer and seller, an account sales flows specifically from an agent to a principal, which is what separates a consignment relationship from a straightforward sale, as detailed in this overview of consignment terminology.

Continuing the earlier example, if the Jaipur dealer sells 700 out of the 1,000 kurtas in a month, the account sales sent to the Surat manufacturer would show the number sold, the rate at which they were sold, freight and godown rent paid by the dealer, the commission the dealer is entitled to, and the net amount payable to the manufacturer.

Why the consignor depends on it 🔗

The consignor cannot record actual sales, expenses, or profit on a consignment until the account sales arrives, since the consignor has no direct visibility into what happens at the consignee’s end. This is why, in most textbook problems, the consignment account is only finalised after incorporating figures from this statement.

Recurring and non-recurring expenses 🔗

Not every expense in a consignment is treated the same way in accounting. Non-recurring expenses are the ones incurred to get the goods from the consignor’s premises to the consignee’s location and ready for sale. These typically include freight, carriage, loading charges, and insurance in transit. They are incurred only once for a given batch of goods and are always added to the cost of goods while valuing unsold stock.

Recurring expenses, on the other hand, are incurred after the goods reach the consignee, and often repeat with each selling cycle. Godown rent, local advertising, and selling expenses fall into this category. Because these costs relate to the effort of actually making a sale rather than getting the goods to the destination, they are generally not added while valuing the closing stock still lying unsold with the consignee.

This distinction matters a great deal in numerical problems. Getting the classification wrong changes the valuation of unsold stock and, by extension, the profit shown on the consignment.

Commission: how consignees get paid 🔗

A consignee acts as an agent, not an owner, so they are compensated through commission rather than by keeping the difference between cost and selling price. There are three broad types worth knowing.

Ordinary commission 🔗

This is the standard commission, calculated as a fixed percentage of the gross sales made by the consignee, regardless of whether the sales were for cash or on credit. If nothing else is mentioned in a problem, “commission” refers to this ordinary commission.

Del credere commission 🔗

When a consignor wants the consignee to also bear the risk of bad debts from credit sales, an additional commission called del credere commission is offered. In exchange for this extra payment, the consignee guarantees payment even if a customer defaults, which shifts the credit risk away from the consignor. Unless stated otherwise, this commission is calculated on total sales rather than only credit sales, a point that trips up many students, as noted in this explanation of consignment accounting principles.

Overriding commission 🔗

Sometimes a consignor wants to reward a consignee for exceptional performance, such as selling above the invoice price or successfully entering a new market. This extra incentive, paid over and above the ordinary commission, is known as overriding commission. It is often calculated as a percentage of the amount realised above a benchmark price rather than on total sales.

Advance: a token of good faith 🔗

Before goods are even sold, a consignee may pay the consignor an advance, whether in cash, by cheque, or through a bill of exchange. This serves two purposes: it gives the consignor some working capital while goods are still in transit or unsold, and it signals the consignee’s commitment to the arrangement. This advance is not treated as income at the time it’s received. Instead, it sits as a liability in the consignor’s books and gets adjusted against the final amount due once the account sales is prepared and the consignee’s dues are settled.

Normal loss versus abnormal loss 🔗

Goods sent on consignment can be damaged or lost along the way, and accounting treats these losses very differently depending on their cause.

With normal loss, since it’s built into the nature of the goods, no separate accounting entry is passed to record the loss itself. Instead, the cost of the total quantity sent is divided by the reduced quantity (after removing the normal loss) to arrive at a slightly higher cost per unit for the remaining stock. This detailed treatment is explained well in this breakdown of normal and abnormal loss in consignment.

Abnormal loss, by contrast, is treated as a one-off event that shouldn’t distort the regular profit picture. Its value, at cost, is removed from the consignment account and shown separately, adjusted for any insurance claim or scrap recovery, before the net loss hits the profit and loss account. For instance, in this CA Foundation study material on consignment accounting, a batch where goods worth several thousand rupees were destroyed in transit shows exactly this separate treatment, keeping the abnormal loss out of the routine consignment profit calculation.

Because normal loss reduces the quantity available for sale without any special bookkeeping, while abnormal loss requires its own entry and valuation, students often lose marks by mixing the two up in exam problems. A quick way to remember it: if the loss is something you’d expect on every shipment, treat it as normal; if it’s a one-time mishap, treat it as abnormal, a distinction also reinforced in this explanation of normal versus abnormal loss.

Bringing it all together 🔗

Picture a pharmaceutical distributor sending medicines to retail pharmacies on consignment. The proforma invoice lists every batch dispatched. Freight and insurance to get the medicines to the pharmacy count as non-recurring expenses, while the pharmacy’s monthly rent doesn’t. The pharmacy earns ordinary commission on what it sells, and if it also agrees to bear the risk of unpaid dues from hospitals buying on credit, it earns del credere commission too. Some units expiring on the shelf would be a normal loss, while a batch destroyed in a fire would be an abnormal loss. At the end of the month, the pharmacy sends an account sales summarising all of this, and the distributor finally books the actual profit.

Once you see how these terms interact in a real scenario, consignment problems stop feeling like a list of definitions and start feeling like a straightforward sequence of events.

What do you think? If you were a consignor sending goods worth lakhs of rupees to a consignee in another city, would you rather offer del credere commission to reduce your credit risk, or keep control over collections yourself? And how would you decide where to draw the line between what counts as a normal loss versus an abnormal one for a perishable product?

References

1. https://edurev.in/t/162664/Unit-3-Consignment
2. https://www.yourarticlelibrary.com/accounting/consignment-accounts/7-terms-used-in-consignment-accounts/50526
3. https://www.taxmann.com/post/blog/consignment-accounts-principles-and-practice-of-accounting/
4. https://www.accountingformanagement.org/normal-and-abnormal-loss-in-consignment/
5. https://gstguntur.com/consignment-accounting-ca-foundation-accounts-study-material/
6. https://www.vedantu.com/commerce/normal-and-abnormal-loss