Friday, July 3, 2015

Consignment Accounting

Learning Consignment Accounting through example
Tenali îs medium sized town în Andhra Pradesh, M/s Innova Steels manufactures & sells steel utensils în Tenali, There are two big cities located near Tenali, Vijayawada, 30km to its north & Guntur 25 kms to its west, There îs also small town, Ponnur located 25 kms south of it, Innova steels had been consistently making profits for last few years, It used to make & sell different kinds of steel utensils locally în Tenali only,
Objectives of Business
The basic objective of business îs to make profits, Growth îs one another objective of business, Even în targeting growth/expansion, their objective îs to bring în growth în overall profits,
Innova Steels îs also thinking of growing its business by expanding market areas to cities & towns nearby, It identified Vijayawada, Guntur & Ponnur as its potential markets, For this it conducted preliminary study of market potential & conditions în three places,
New places » New business associates
·         Vijayawada
In Vijayawada, Innova Steels identified, M/s Maruthi Steel Traders as dominant business house dealing în selling steel utensils, So they approached M/s Maruthi traders for business association to sell products manufactured by them at Vijayawada,
The ownership of M/s Maruthi Steel Traders, being conservative natured offered to sell their product on condition that they would not be required to invest anything for business & moreover they would only stock goods of Innova Steel, sell them at price that îs decided by Innova Steel on commission basis, This was agreed upon to be 10% of sale proceeds, M/s Maruthi Traders are also to be reimbursed any incidental expenses incurred by them, This proposal was agreed to by Innova Steels,
·         Guntur
In Guntur, Innova Steels identified M/s Rahim Traders as dominant business house dealing în selling steel utensils, So they approached M/s Rahim Traders for business association to sell products manufactured by them at Guntur, They made offer similar to one agreed upon between them & M/s Maruthi Steel Traders at Vijayawada,
The ownership of M/s Rahim Traders was not willing to proposal, They being people willing to take risk în anticipation of making profits, asked Innova Steels to work out different plan for them, They told Innova Steels that they could assess profits made by M/s Innova Steels which they think would be around 40% of sale proceeds, For that reason they wanted returns based on profits made by Innova Steels on goods sold by them, However they were also not willing to invest capital, For this reason, Innova Steels worked out profit sharing deal with M/s Rahim Traders, They decided to account for transactions separately & share profits of business, Stock being investment of M/s Innova Steels & Sale efforts being investment of M/s Rahim Traders, Expenses are to be borne by both but are to accounted for în deciding profits,
·         Ponnur
In Ponnur, Innova Steels could not identify proper business house that was dealing în selling steel utensils, There were only few small shops selling steel utensils, Innova Steels identified that it would be appropriate to set up trading unit on its own to sell its products, Since it was small town, it would not cost them much to set up shop, It would be directly working under them & can be managed with single employee to look after shop, This would enable them to retain total margin,
Different options » Different Business Methodologies
If we go through deals proposed to be made by Innova Traders at three places we will notice that there îs are fundamental differences between three options/methods for doing business,
·         At Vijayawada » Consignment
o    Consign
Send / Give over to another for care - safekeeping,
o    Consignment
The delivery of goods for sale - disposal,
The method of doing business, where M/s Maruthi Steel Traders were selling stock on behalf of Innova Steels îs called "Consignment", The act of sending goods îs called Consigning,
o    Consignor
The person sending goods îs called "Consignor" (M/s Innova Steels here)
o    Consignee
The person receiving goods & selling them îs called "Consignee" (M/s Maruthi Traders here),
o    Consignor has ownership & risk în goods
The ownership & thereby risk în total stock îs with Consignor, The consignee holds goods on behalf of consignor, The consignor îs responsible for acts of consignee în his status as agent,
o    Consignee îs Agent
The consignee acts as agent of consignor only, The Consignee sells goods on behalf of consignor & receives commission for his efforts, Any incidental expenses on sale are to be reimbursed by consignor - as agreed between them,
o    Relationship between Consignor & Consignee îs Principal - Agent relationship
The Consignee acts în status of agent to consignor, i,e, relationship between "Consignor" & "Consignee" îs that of "Principal & Agent", The transactions between them are governed by agreement made between them as well as by provisions of "The Law of Agency",
·         At Guntur » Partnership/Joint Venture,
The method of doing business, where M/s Rahim Traders sell goods for joint benefit of both Innova Steels as well as themselves îs called Partnership & if this relationship îs for short duration we call it Joint Venture, Both parties are owners of business, The profits of business are shared between them as agreed upon by them at time of getting into relationship, We will discuss în detail about nature of this while learning Accounting for Joint Ventures,
·         At Ponnur » Branch
The method of doing business, where M/s Innova Steels are setting up shop on their own îs called "Branch", The person conducting business îs employee of Innova Steels, All ownership & risk în business îs with Innova Steels, We will learn more about this while learning "Branch Accounting",
With this understanding în mind we shall now move on to process of designing accounting system for consignments, We have to note that M/s Innova Steels as well as M/s Maruthi Traders have existing business for which they have been preparing their Trading a/c's to decide basic profit (gross profit) of business & also Profit & Loss a/c's to ascertain net profits made by organisation,
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