In the dealer-agent relationship, the agent merely undertakes to sell the goods on behalf of the dealer at the best possible price. For these services, he receives compensation in the form of commission on the sales. Until the goods have been sold, they remain the property of the dealer and not of the agent. This means that the dealer is entitled to the proceeds from the sale of the goods dispatched, so the agent is obliged to pay the dealer the proceeds after deducting his commissions and expenses.
Usually each consignment is identified separately, by the opening of an independent account for it and the profit (loss) per consignment is determined as soon as the result is known. Goods sent to a consignee remain the property of the consignor until sold and in the case of a perpetual accounting inventory system the consignment is journalised at cost.
In the case of a periodic accounting inventory system, the purchases account will be credited. The consignment 'accounting account' has a twofold purpose: it serves as an inventory account for goods held by agents and also as a consignment income account.
Costs such as rail or sea freight or insurance will be incurred on each consignment. These additional costs form part of the cost of the consignment inventory and must be debited to the appropriate consignment 'accounting account'.
As soon as the consignor receives details from the agent regarding the sale of goods, he (the consignor) is able to determine the profit or loss on the consignment. The notice or accounting report received from the agent is known as an account sale and provides full details about the goods received by the agent, goods sold, cost incurred by the agent, a debit for his compensation (commission) and the balance of unsold goods.
Thus, the consignment 'accounting account' contains all the details concerning the consignment transactions. Therefore, a profit (loss) can be determined and transferred to the general income account. The balance on the account represents the cost price of the unsold inventory and is shown, together with other inventories, in the financial accounting statements.
The cost price of unsold inventory consists of the initial purchase price plus the proportional portion of all costs related to the consignment, but excluding commission. Commission is a function of sales and is, therefore, a selling expense that must be written off against the profit (loss) arising from the particular sales transaction.
When the agent receives the goods, he does not usually make a formal accounting entry, since he did not purchase the goods nor did they belong to him. However, he will keep an inventory record to record the receipt and sales of the goods. An alternative would be to debit a consignment received 'accounting account' with the invoice price and to credit the consignor. When the goods are sold the amount will be credited to the 'consignment accounting received account'.
Michael Russell
Your Independent guide to Accounting
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