27 November 2009
I am doing my MBA project in final accounts in a firm which does business on consignment. They purchase a stock on consignment at higher value than their sales value which they sells to their customers. The difference (sales value-purchase value) amount is being reimbursed to them by the company from whom they have purchased.
In their trading accounts they have shown as nil gross profit. their calculation was as follows Debit side Purchase 1000 pcs @ Rs. 1250 = 12,50,000 (-) Purchase diff(of sales qty) 350 @ rs.250 = 87,500 TOTAL DEBIT BALANCE = 11,62,500
27 November 2009
As per my understanding, the method of accounting is wrong. Because, in consignment business, the consignee will not get the ownership of goods and hence he cannot debit the amount in purchase account. Consequently the question of debit entry for puchase difference also does not arise. Like wise, he being not the owner of goods, he cannot credit the amount received in sales account. Ultimately, in such a situation there is no need to prepare a trading account. Instead, the consignee can prepare a 'consignment account' in which the referred transaions can be booked with narrations other than purchase/sales.
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