Consignment and joint venture accounts

In short

A consignment is the despatch of goods by one party (the consignor) to another (the consignee) for sale on the consignor's behalf, against a commission - ownership never passes to the consignee, so the unsold goods remain the consignor's stock. A joint venture is a short-term business arrangement in which two or more persons (co-venturers) combine money, goods or skill for a specific deal and share profit in an agreed ratio without forming a partnership firm. Both are classic B.Com Financial Accounting chapters because they test consignment and joint venture profit computation, valuation of unsold stock with loading, and treatment of normal and abnormal loss. They are examined in university semester papers (usually one 15-mark problem), in CA/CS/CMA Foundation, and in placement tests and interviews for accounts-executive, audit, FMCG distribution and commodity-trading roles. Commercially the same logic now runs India's consignment stocks, C&F agency networks and the agent-versus-principal revenue test under Ind AS 115 / AS 9.

Explained

Consignment: parties, documents and basic nature

• Consignor - owner who sends the goods; consignee - agent who sells them and remits proceeds. Legal relationship is principal and agent under the Indian Contract Act, 1872 (Chapter X, agency).
• Proforma invoice - a statement sent with the goods showing quantity and price; it is *not* an invoice of sale and creates no debt.
• Account sales - periodic statement sent by consignee to consignor showing gross sales, expenses incurred, commission, advance adjusted and net amount due.
• Risk and reward stay with the consignor: the consignee is not liable for market loss, bad debts (unless del credere) or decline in value.
• Consignment is not a sale: no revenue is recognised on despatch; revenue arises only when the consignee sells to a third party (AS 9; under Ind AS 115 the goods remain in the consignor's inventory because control has not transferred).

Commission and its types

• Ordinary (general) commission - a fixed percentage of gross sale proceeds for effecting the sale; no protection against bad debts.
• Del credere commission - extra commission for which the consignee bears the risk of bad debts; consequently bad debts are *not* debited to the Consignment A/c, they are the consignee's loss.
• Over-riding commission - extra percentage on sales above a stated price or on sales of a new product, to motivate higher realisation.
• Commission is normally computed on gross sale proceeds unless the question says otherwise; if del credere is "on credit sales only", apply it only to credit sales.
• Where the consignee bears del credere risk, any bad debt is ignored in the consignor's books; where he does not, bad debt is an expense of the consignment.

Expenses, loading and the invoice-price method

• Consignor's (non-recurring) expenses - freight, insurance in transit, loading, packing, export duty: incurred to bring goods to the consignee's godown; these are added to the cost of goods for valuing unsold stock.
• Consignee's expenses - godown rent, storage, selling and advertising, carriage on sales (recurring) are *not* added to stock value; unloading, octroi and clearing charges paid by the consignee *are* non-recurring and are added.
• All expenses, whoever pays, are ultimately the consignor's and are debited to the Consignment Account; the consignee's payments are credited to Consignee's Account.
• Invoice price (loading) method: goods are often invoiced above cost to hide the true profit from the consignee. Loading = invoice price − cost. Loading on goods sent, on returns and on closing stock must be reversed through Goods Sent on Consignment A/c or a Stock Reserve so that the Consignment A/c shows the real profit.
• Advance from consignee (cash or bill of exchange) is *not* income - it is credited to Consignee's A/c; if the bill is discounted, the discount is a financial charge (debited to Discount/P&L, or to Consignment A/c only if the question treats it as a consignment expense).
• Accounting entries in the consignor's books use three accounts - Consignment to … A/c (nominal, shows profit), Goods Sent on Consignment A/c (closed to Trading A/c or Purchases), and Consignee's A/c (personal).

Normal and abnormal loss

• Normal loss - unavoidable, inherent wastage: evaporation, drying, leakage, sand in grain, breakage of fragile items in normal handling. No separate entry is passed; its cost is absorbed by the good units, so cost per unit of stock rises.
• Valuation rule: inflate the per-unit cost - divide total cost (goods + consignor's non-recurring expenses + consignee's non-recurring expenses) by the net quantity after normal loss.
• Abnormal loss - avoidable, accidental: theft, fire, flood, accident in transit, loss by negligence. It is valued like closing stock (cost + proportionate non-recurring expenses) and credited to the Consignment A/c, debited to Abnormal Loss A/c; the insurance claim admitted is debited to Insurance Company A/c and the balance (uninsured loss) transferred to Profit and Loss A/c.
• Abnormal loss is kept out of the consignment result so that the Consignment A/c shows normal trading profit.
• Closing stock valuation = lower of (cost + proportionate non-recurring expenses) and net realisable value, consistent with AS 2 / Ind AS 2 on inventories.
• Stock on consignment appears in the consignor's Balance Sheet as current asset; if valued at invoice price, a Stock Reserve equal to the loading is deducted.

Consignee's books and GST note

• The consignee does not record the goods as purchases. Entries: on sale - Cash/Debtors Dr., Consignor's A/c Cr.; expenses paid - Consignor's A/c Dr.; commission earned - Consignor's A/c Dr., Commission Received Cr.; remittance - Consignor's A/c Dr., Bank Cr.
• Goods held are disclosed only as a note (goods held on behalf of the consignor), not as the consignee's stock.
• GST: under Schedule I of the CGST Act, 2017 the supply of goods by a principal to his agent (who will supply them on the principal's behalf) is treated as a supply even without consideration, so e-way bill/invoicing requirements apply on despatch; a consignment agent must register compulsorily under section 24 irrespective of turnover. Rates and procedural details change - verify the current notification before applying.

Joint venture: nature and methods of accounting

• Features: specific purpose, limited duration, agreed profit-sharing ratio, joint control; it ends when the venture is complete. No separate legal entity, no registration, and the Indian Partnership Act, 1932 does not govern it (though a joint venture is in substance a particular partnership for a single adventure).
• Method 1 - Separate set of books: used where the venture is large. Open a Joint Bank A/c, a Joint Venture A/c (nominal) and a personal account for each co-venturer. Contributions Dr. Joint Bank, Cr. Co-venturer; purchases and expenses Dr. Joint Venture; sales Cr. Joint Venture; profit divided in the agreed ratio and credited to co-venturers; Joint Bank finally closed by paying each co-venturer his balance.
• Method 2 - Memorandum joint venture method: each co-venturer records only his own transactions in a "Joint Venture with X A/c" (debit what he spends/contributes, credit what he receives). A Memorandum Joint Venture A/c - not part of double entry - is prepared by combining all co-venturers' figures to find the venture profit; each then debits his personal Joint Venture A/c with his share of profit and credits P&L A/c. The balance in "Joint Venture with X A/c" shows the amount due to or from the other.
• Method 3 - Each party keeps a full record of all transactions in his own books (one set of identical accounts in each book); little used in exams today.
• Unsold stock taken over by a co-venturer is credited to the Joint Venture A/c at the agreed value (treated as if sold to him); unsold stock not taken over is carried as stock and reduces loss.
• Items such as interest on capital contributed, commission to a venturer for managing, or a salary are charged to the Joint Venture A/c before dividing profit only if agreed.

Current Indian standards and practice

• AS 9 (non-Ind AS companies): revenue on consignment is recognised only when the consignee sells; commission income is recognised when the service is rendered.
• Ind AS 115 - Revenue from Contracts with Customers: the principal versus agent test. If the intermediary does not control the goods before transfer, it is an agent and recognises only net commission; the principal recognises the gross sale. Indicators of control: primary responsibility for fulfilment, inventory risk, discretion in pricing.
• Ind AS 111 - Joint Arrangements classifies arrangements as joint operations (each party accounts for its own assets, liabilities, revenue and expenses) or joint ventures (equity method under Ind AS 28); proportionate consolidation is not permitted under Ind AS. AS 27 (Financial Reporting of Interests in Joint Ventures) still allows proportionate consolidation for jointly controlled entities for non-Ind AS companies. The B.Com "joint venture accounts" chapter is the traditional single-venture bookkeeping, distinct from these standards - know the difference.
• Companies Act, 2013 and Schedule III require consignment stock lying with agents to be shown under inventories with disclosure; AS 2/Ind AS 2 govern its valuation.

Key points

• Consignment - despatch of goods to an agent for sale; ownership and risk stay with the consignor.
• Proforma invoice - accompanies consigned goods; not evidence of sale and creates no liability.
• Account sales - consignee's statement of sales, expenses, commission and net remittance.
• Goods Sent on Consignment A/c - closed by transfer to Trading A/c (or Purchases); its loading is reversed.
• Loading - excess of invoice price over cost; must be removed from goods sent, returns and closing stock.
• Stock Reserve - provision equal to loading on closing stock, deducted from stock in the Balance Sheet.
• Del credere commission - makes the consignee bear bad debts, so bad debts are not a consignment expense.
• Over-riding commission - additional commission on sales above a specified price.
• Non-recurring expenses - incurred up to the consignee's godown; included in unsold stock value.
• Recurring expenses - godown rent, selling and insurance of stock; excluded from stock value.
• Normal loss - inherent wastage; no entry, cost spread over remaining good units.
• Abnormal loss - accidental; valued like stock, credited to Consignment A/c, net loss to P&L.
• Closing stock - at cost plus proportionate non-recurring expenses or NRV, whichever is lower (AS 2).
• Joint venture - temporary association of co-venturers for a specific transaction with agreed profit sharing.
• Joint Bank A/c - used only in the separate-books method; closed by final distribution.
• Memorandum Joint Venture A/c - a non-double-entry working to compute venture profit when each party keeps his own record.
• Unsold JV stock taken over - credited to Joint Venture A/c at agreed value, treated as a sale to that venturer.
• Ind AS 115 agent test - no control over goods means recognise net commission, not gross sales.

Formulas and examples

Units: all amounts in rupees (₹); quantities in the units of the problem (kg, crates, bags, units).

Example 1 - Consignment at cost with normal loss and abnormal loss. Ramesh of Nagpur consigned 1,000 crates of mangoes costing ₹400 each to Suresh of Pune. He paid freight ₹20,000 and insurance ₹5,000. 50 crates were destroyed in a road accident in transit (abnormal); normal leakage/spoilage was 30 crates. Suresh paid clearing charges ₹9,200 and godown rent ₹6,000, sold 800 crates at ₹600 each, and is entitled to 5% commission. Insurance claim admitted ₹18,000.

1. Cost of goods sent = 1,000 × 400 = ₹4,00,000. Consignor's non-recurring expenses = 20,000 + 5,000 = ₹25,000.
2. Abnormal loss (occurred in transit, so only consignor's expenses are proportionate): per crate = (4,00,000 + 25,000)/1,000 = ₹425. Abnormal loss = 50 × 425 = ₹21,250.
3. Crates reaching the godown = 950. Clearing charges ₹9,200 are non-recurring → add. Cost base for good units = (950 × 425) + 9,200 = 4,03,750 + 9,200 = ₹4,12,950.
4. Good crates after normal loss = 950 − 30 = 920. Cost per crate = 4,12,950/920 = ₹448.859 (₹448.86).
5. Unsold = 920 − 800 = 120 crates. Closing stock = 120 × 448.859 = ₹53,863 (rounded).
6. Sales = 800 × 600 = ₹4,80,000. Commission = 5% × 4,80,000 = ₹24,000.
7. Consignment A/c: Credits = 4,80,000 + 53,863 + 21,250 = ₹5,55,113. Debits = 4,00,000 + 25,000 + 9,200 + 6,000 + 24,000 = ₹4,64,200. Profit = ₹90,913.
8. Abnormal loss to P&L = 21,250 − 18,000 = ₹3,250 net loss. Amount due from Suresh = 4,80,000 − 9,200 − 6,000 − 24,000 = ₹4,40,800.

Example 2 - Invoice price (loading) method. A sent 500 machines costing ₹2,000 each to B, invoiced at ₹2,500 each. Freight paid by A ₹25,000. B sold 400 machines at ₹3,000 each, paid selling expenses ₹18,000, and gets 10% commission on sales.

1. Invoice value of goods sent = 500 × 2,500 = ₹12,50,000; cost = ₹10,00,000; total loading = ₹2,50,000 (25% on cost, 20% on invoice price).
2. Closing stock (100 units) at invoice price = 100 × 2,500 = ₹2,50,000; add proportionate freight = 25,000 × 100/500 = ₹5,000 → stock at IP = ₹2,55,000. Stock Reserve = loading on 100 units = 100 × 500 = ₹50,000. Stock at cost basis in the Balance Sheet = ₹2,05,000.
3. Consignment A/c (at invoice price): Dr. Goods sent 12,50,000 + Freight 25,000 + Selling expenses 18,000 + Commission (10% × 12,00,000) 1,20,000 = ₹14,13,000. Cr. Sales 12,00,000 + Closing stock 2,55,000 = ₹14,55,000 → apparent profit ₹42,000.
4. Add back loading on goods sent ₹2,50,000 and deduct the stock reserve ₹50,000: true profit = 42,000 + 2,50,000 − 50,000 = ₹2,42,000.
5. Check directly: sales 12,00,000 − cost of 400 units sold (400 × 2,000 = 8,00,000) − freight on 400 units (20,000) − selling expenses 18,000 − commission 1,20,000 = ₹2,42,000. ✔

Example 3 - Commission with del credere. Sales by the consignee: cash ₹3,00,000 and credit ₹5,00,000. Ordinary commission 4% on gross sales, del credere 2% on credit sales. Bad debts ₹12,000; sales above ₹7,00,000 carry over-riding commission of 5% on the excess.

1. Gross sales = ₹8,00,000. Ordinary commission = 4% × 8,00,000 = ₹32,000.
2. Del credere = 2% × 5,00,000 = ₹10,000. Over-riding = 5% × (8,00,000 − 7,00,000) = ₹5,000.
3. Total commission = ₹47,000. Bad debts ₹12,000 are not charged to the Consignment A/c - the del credere commission transfers that risk to the consignee.
4. Net amount due from consignee (ignoring expenses and advance) = 8,00,000 − 47,000 = ₹7,53,000; the consignee absorbs the ₹12,000 bad debt in his own P&L.

Example 4 - Joint venture, separate set of books. X and Y enter a venture to trade in cotton bales, sharing profit 3:2. X pays ₹6,00,000 and Y ₹4,00,000 into a joint bank account. Purchases ₹8,50,000, freight and godown ₹70,000, brokerage ₹15,000 are paid from the joint bank. Sales realised ₹10,80,000 (banked). Unsold bales worth ₹60,000 are taken over by Y at that value.

1. Joint Venture A/c debits = 8,50,000 + 70,000 + 15,000 = ₹9,35,000. Credits = Sales 10,80,000 + Stock taken by Y 60,000 = ₹11,40,000.
2. Venture profit = 11,40,000 − 9,35,000 = ₹2,05,000. X's share (3/5) = ₹1,23,000; Y's share (2/5) = ₹82,000.
3. Joint Bank A/c: receipts 6,00,000 + 4,00,000 + 10,80,000 = ₹20,80,000; payments 9,35,000 → balance = ₹11,45,000.
4. X's account: 6,00,000 + 1,23,000 = ₹7,23,000 payable. Y's account: 4,00,000 + 82,000 − 60,000 (stock taken over) = ₹4,22,000 payable. Total 7,23,000 + 4,22,000 = ₹11,45,000 = joint bank balance. ✔

Example 5 - Memorandum joint venture method. P and Q share equally. P buys goods for ₹2,40,000 and pays freight ₹10,000; Q pays advertising ₹14,000 and godown rent ₹6,000. Q sells all goods except stock worth ₹20,000 (taken over by P at that value) for ₹3,10,000. Each keeps only his own records.

1. Memorandum Joint Venture A/c - debits: purchases 2,40,000, freight 10,000, advertising 14,000, rent 6,000 = ₹2,70,000. Credits: sales 3,10,000, stock taken by P 20,000 = ₹3,30,000. Profit = ₹60,000; ₹30,000 each.
2. In P's books, "Joint Venture with Q A/c": Dr. 2,40,000 + 10,000 = 2,50,000; Dr. share of profit 30,000 (Cr. P&L) = 2,80,000. Cr. stock taken over 20,000 → balance ₹2,60,000 receivable from Q.
3. In Q's books, "Joint Venture with P A/c": Dr. 14,000 + 6,000 = 20,000; Dr. profit share 30,000 = 50,000. Cr. sales received 3,10,000 → balance ₹2,60,000 payable to P. ✔ Q remits ₹2,60,000 and the venture closes.

Where it is used

• FMCG and consumer durables distribution: companies such as Hindustan Unilever, Dabur and Asian Paints move stock to C&F agents and super-stockists on consignment; the stock stays in the company's books until agent-to-retailer sale.
• Agri-commodities and APMC mandis: farmers and traders consign grain, cotton, spices and fruit to commission agents (*arhatiyas*); normal loss from drying and the *arhat* commission are exactly the textbook entries.
• Pharma and auto spares: consignment stock held at distributor or hospital locations with VMI (vendor-managed inventory) arrangements; also e-commerce fulfilment and "sale or return" arrangements.
• Joint ventures in real estate and infrastructure: builders combine land and finance for a single project; EPC consortia (for example an NHAI highway package) share a specific contract's profit - accounted as joint operations under Ind AS 111 for large companies.
• Job roles: accounts executive and stock accountant (agent reconciliation, consignment stock audit), internal auditor verifying account sales and GST on principal-to-agent supply, finance analyst applying the Ind AS 115 principal/agent test to marketplace revenue.
• Exams and recruitment: B.Com and BBA semester papers, CA/CS/CMA Foundation, banking and SSC commerce sections, and accounting rounds at Big 4 tax/audit, Deloitte USI, Genpact, WNS and TCS BPS.

Interview questions

• Q: Why is a consignment not treated as a sale? A: Ownership, risk and reward stay with the consignor; the consignee only acts as agent, so revenue is recognised only when the goods are sold to a third party.
• Q: What is del credere commission and how does it change the entries? A: Extra commission under which the consignee bears bad-debt risk; bad debts are therefore not debited to the Consignment A/c but borne by the consignee.
• Q: How is unsold stock on consignment valued? A: At cost of the goods plus a proportionate share of non-recurring expenses (freight, insurance, clearing), or net realisable value if lower, as required by AS 2 / Ind AS 2.
• Q: Which expenses are excluded from the value of unsold consignment stock? A: Recurring expenses after the goods reach the consignee's godown - godown rent, storage, advertising, selling expenses, carriage outward and commission.
• Q: How do normal and abnormal loss differ in treatment? A: Normal loss needs no entry and raises the cost per unit of the remaining goods; abnormal loss is valued like closing stock, credited to the Consignment A/c, and the uninsured part goes to P&L.
• Q: What is loading and why is it reversed? A: The excess of invoice price over cost, used to conceal profit from the consignee; it is reversed on goods sent, returns and closing stock so the Consignment A/c shows the true profit.
• Q: Where does consignment stock appear in the consignor's Balance Sheet? A: Under inventories as a current asset - "stock with agents" - less the stock reserve if it has been valued at invoice price.
• Q: Is an advance received from a consignee income? A: No, it is credited to the consignee's personal account as a liability-side adjustment and set off against the amount finally due.
• Q: How does a joint venture differ from a partnership? A: A joint venture is for one specific, short-duration transaction with no firm name or registration and is governed by the parties' contract, whereas a partnership is a continuing business under the Partnership Act, 1932.
• Q: What is the memorandum joint venture account? A: A non-double-entry working that combines each co-venturer's own transactions to compute venture profit when no separate set of books is maintained.
• Q: How is unsold joint venture stock taken over by a co-venturer recorded? A: Credited to the Joint Venture A/c at the agreed value and debited to that venturer's account, as though sold to him.
• Q: Under Ind AS 115, when does an intermediary report only commission instead of gross sales? A: When it does not control the goods before transfer - no inventory risk, no pricing discretion and no primary responsibility for fulfilment - so it is an agent and reports net commission.

Common mistakes

• Adding recurring expenses such as godown rent, advertising or carriage outward to the value of unsold stock.
• Passing an entry for normal loss instead of simply dividing cost by the reduced quantity, or dividing by the units sold rather than the good units available.
• Valuing abnormal loss at selling price, or forgetting to credit it to the Consignment A/c before computing profit.
• Debiting bad debts to the Consignment A/c even when del credere commission has been allowed.
• Forgetting to reverse the loading on goods sent and to create a stock reserve on closing stock under the invoice-price method, which overstates or understates profit.
• Computing commission on net sales, or on the cost/invoice value, instead of the agreed base (usually gross sale proceeds).
• In joint ventures, omitting the unsold stock taken over by a venturer, or crediting a venturer's personal account with profit while forgetting to reduce it by cash and goods he has already received - the final balances then fail to tie to the joint bank balance.

Related topics

Final accounts · Partnership accounts · Branch and departmental accounts · Hire purchase and instalment accounting · Key Ind AS standards explained · Journal, ledger and trial balance