gross profit nIL in a consignment business

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naren (Querist)
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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

Credit side
Sales 350 pcs @ Rs.1000 = 3,50,000
Closing stock
650 pcs @ Rs.1250 = 8,12,500
TOTAL CREDIT BALANCE = 11,62,500

HENCE Gross profit is NIL

NOW I WOULD LIKE TO KNOW WHETHER THEIR WAY OF PRODUCING ACCOUNTS IS PROPER

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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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.

naren

naren (Querist)
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28 November 2009 10

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Kishanlal Paliwal

Kishanlal Paliwal (Expert)
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28 November 2009 Agreed with Shri B.Chakrapani,

It is advisable to maintain the Consignment Account and all contra entries in Consignor Account.

All goods movement transaction to be booked into consignment account giving second effect into consignor account.

At the period end the balance on account of receipt and disposal of goods to be transferred to consignor account.

All expenses is to be debited into Consignor account.

It is better to close the consignor account year wise.

Regards

naren

naren (Querist)
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29 November 2009 hi