Accounting for consigned goods
2.4. Accounting for sale of consigned merchandise
By the end of the period, BestHome sells 50% of the consigned gas valves for $8,000. According to the consignment agreement, BestHom must receive a 15% commission on the sales (i.e., $1,200 = $8,000 x 0.15) and must be reimbursed for the 2% credit card processing fee (i.e., $160 = $8,000 x 0.02).
Consignor: Friends Company does not make any journal entry until it is notified by the consignee (e.g., receives an Account Sales Report).
Consignee: BestHome would make the following journal entry to record the sale of the consigned goods:
Consignee: sale of consigned merchandise
Account Titles |
Debit |
Credit |
Cash |
$8,000 |
|
Payable to Friends Company |
$8,000 |
Consignee: expenses incurred in connection with consignment
Account Titles |
Debit |
Credit |
Receivable from Friends Company |
$160 |
|
Cash |
$160 |
2.5. Accounting for notification of sales and expenses
BestHome notifies Friends Company of the sales and expenses by sending an Account Sales Report, retains a 15% commission, and remits cash due to Friends Company.
Consignor: Friends Company makes the following journal entry:
Consignor: notification of sales and expenses and receipt of cash from consignee
Account Titles |
Debit |
Credit |
Cash |
$5,640 |
|
Advertising Expense |
$1,000 |
|
Commission Expense |
$1,200 |
|
Cost of Goods Sold |
$160 |
|
Revenue from Consignment Sales |
$8,000 |
Consignee: BestHome makes the following journal entry:
Consignee: notification of sales and expenses and remittance of cash to consignor
Account Titles |
Debit |
Credit |
Payable to Friends Company |
$8,000 |
|
Receivable from Friends Company |
$1,160 |
|
Commission Revenue |
$1,200 |
|
Cash |
$5,640 |
2.6. Accounting for adjustment of inventory on consignment
Inventory on consignment should be adjusted for the cost of sales.
Consignor: to record the transfer of the inventory cost to the cost of goods sold, Friends Company makes the following journal entry:
Consignor: recognize the cost of goods sold
Account Titles |
Debit |
Credit |
Cost of Goods Sold [50% x ($7,000 + 600)] |
$3,800 |
|
Consignment Inventory |
$3,800 |
The cost of goods sold in this example includes not only 50% of the original inventory cost (i.e., $3,500 = $7,000 x 0.50) but also 50% of the shipping expense (i.e., $300 = $600 x 0.50):
Consignee: BestHome does not make any journal entry.
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