A part of goods consigned will still be unsold and will be lying with the consignee. In order to calculate the true profit or loss on consignment, the unsold stock should be valued and accounted for. Let us therefore, learn first how the unsold stock is valued.
Valuation of Unsold Stock
You know that valuation of unsold stock is usually done at cost. In case of consignment, cost of stock would include the cost at which the goods are consigned plus the proportionate non-recurring expenses i.e., all those expenses incurred till the goods reach the godown of the consignee. You should note that all non-recurring expenses, whether incurred by the consignor or by the consignees, are to be taken into account. In the absence of details of expenditure incurred by the consignee, all expenses incurred by him are to be taken as recurring expenses and thus are not to be considered in the calculation of closing stock. In other words, while valuing the closing stock we add such proportionate expenses to the cost price that have been incurred upto the time the goods are brought to the place of the consignee. Any other expenses paid by the consignor or the consignee after this point will not be considered, as these expenses do not add to the value of the goods. Such expenses are godown rent, selling expenses, carriage outwards, godown insurance, discount etc.
Following expenses are usually added for calculation of closing stock:
Carriage and Freight
Loading Charges
Customs Duty
Clearing Charges
Dock Dues
Carriage paid upto the Godown
Unloading Charges
Following are the expenses which are not considered for calculation of
closing stock:
Godown Rent
Discount
Bad Debts
Insurance of the Goods in the Godown
Selling and Distribution Expenses.
You will notice that all expenses incurred by the Consignor are considered for valuation of the closing stock. The problem arises only in case of Consignee’s expenses. The Consignee’s expenses which are to be included in the value of closing stock are those expenses which are incurred till the goods reach the godown of the Consignee. Any other expenses incurred thereafter are ignored for purposes of closing stock valuation.
Accounting Treatment of Unsold Stock
Since the value of unsold stock affects the profit or loss on any consignment, its valuation and recording in the books of Consignor is very important. It is shown on the credit side of Consignment Account for which the following journal entry will be passed.
Consignment Stock A/c Dr.
To Consignment A/c
(Being the value of closing stock)
The Consignee, however, will not pass any entry for the closing stock. It is because he is not the owner of the goods and does not pass any entry even when he receives or returns the goods.
Goods Returned to the Consignor
The goods returned are to be valued at Cost Price only. They should not include any other expenses. However, all the expenses incurred by the Consignee to return the goods should be considered as the expenses on that consignment. So the Consignment Account is debited and the Consignee’s Account is credited with the amount of expenses incurred on returns.
