Financial Accounting

Meaning of Consignment Accounting

Consignment refers to selling the goods manufactured by a company, through an agent. This method of sales is especially popular among businesses located abroad who want to sell their products in your country. For example, if a US-based company wants to sell its phones in India, it can hire a local agent who will sell the products. The business that is selling its products through an agent is called the consignor. The agent is called the consignee.

The benefit to the consignor of using this business model is that they don’t have to worry about promoting their product and handling customers. They can simply take advantage of the advertising/marketing and customer relationship management (CRM) expertise of another business. This allows the business to focus exclusively on the production of goods and become better at it. It also allows the business to easily expand its scale of operations, without having to set up a branch in a different country.

The benefit to the consignee is that they can make money without manufacturing products. They can earn a commission by selling the products of the consignor. There are 2 types of commissions that consignees earn:

  • Sales commission: This is the type of commission that is paid to all consignees. It is paid as a percentage of the total sales. For instance, if their charge is 10%, then the commission paid will be 10% of the total sales they made.
  • Del credere commission: If the consignee chooses to take responsibility for any irrecoverable debts, they are paid a del credere commission. In this situation, any irrecoverable debts are a loss to the consignee but don’t reduce the amount owed by the consignor.

The consignor sends a pro-forma invoice to the consignee, which provides a record of all the goods sent to them on consignment. It is pro-forma as it doesn’t charge the consignee for these goods.

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