Definition.—When goods are shipped to another party to be sold by him for account of the shipper, the transaction is called a “consignment.” In its original sense, to “consign” means to seal, sign, mark, or label in a formal way. In commerce this term has come to signify goods sent for sale through another party. Usually such goods are marked or labeled to distinguish them from those belonging to the consignee. The owner or sender is designated “the consignor”; the selling or receiving party “the consignee.” Sometimes the word “shipment” is used by the consignor to designate the goods sent away for sale, and the word “consignment” to indicate the goods received by the consignee. Differentiation on this basis is convenient, but the terms “consignments-out” and “consignments-in” are more descriptive and will be used here.

Legal Status.—Before treating the accounts required to record consignment transactions, it is well to understand the legal relations between the consignor and consignee. The general law of bailments and of agency applies in a restricted sense to consignments. A bailment is defined as, “A delivery of goods for the execution of a special object, beneficial to the bailor, the bailee or both, upon a contract expressed or implied, to carry out this object, and dispose of the property in conformity with the purpose of the trust.” Agency is the term used to indicate the legal relation between a principal and the agent who represents him. A person appointing another to act for him in his dealings with third parties is called the principal. The one appointed to represent the principal is the agent. A bailment is therefore a special class of agency transactions with particular rules governing the safe-keeping of the goods of the principal in the possession of the agent. In the case of a consignment, the consignor is the principal and the consignee the agent. The relation of the consignee to the consignor as regards the care to be exercised in handling the consignor’s goods is a bailment relationship.

The Broker.—A broker, although he acts as agent, usually is not a consignee. He acts “as a middleman, bringing people together to trade, or trading for them in the private purchase or sale of any kind of property, which property, ordinarily, is not in his possession.” The charge for his service is usually in the form of a commission, sometimes called brokerage. There are several classes of brokers, named according to the kind of commodity they deal in; for instance, there is the exchange broker, the note broker, the insurance broker, the stock broker, the real estate broker, the merchandise broker, etc.

The Factor.—Other types of middlemen are the manufacturer’s agent, who is a broker or sales agent, effecting sales usually by means of samples; and the factor or commission merchant who actually handles and sells the goods of his principal. The chief distinction between the broker and the factor is that the broker sells goods in the name and for the account of his principal, but the goods are delivered directly to the purchaser by the principal, who also collects the account; whereas the factor has the goods of his principal in his possession and sells them either in his own name or in the name of his principal.

The factor may operate under a specific contract with his principal, covering a single consignment, or under a general contract governing all consignment transactions between the two parties. Again, there may be no formal contract between them, in which case the law sets up a contract relationship based on trade usage and customs in any particular line. Where the factor operates under a specific or general contract, certain points may arise which are not provided for in such contract, and on these points trade custom governs.

Duties of the Factor.—Barring specific instructions, the factor may conduct the consignment transactions for his principal on the same basis and in the same general way as he would conduct them were the goods his own. In other words, he is expected to exercise the same care in the handling of consignment goods as he employs in handling his own property. In selling goods consigned to him he may extend credit to the buyer if it is the custom in that particular line to do so, and he must exercise due care as to the rating of the customer. He must push his collections with ordinary diligence. He may warrant the goods sold if that is customary. He can give good title to goods sold, and this title may even be better than the one possessed by the owner of the goods. A bona fide purchaser who does not know the principal is protected in a sale made by a factor even if the factor exceeded his authority.

Factor Must Protect Goods.—So long as any part of the principal’s goods are unsold and in the possession of the factor, he must protect and safeguard them. He is not liable, however, for damage from forces or conditions over which he has no control. The degree of diligence required of him largely depends on the nature of the goods. What would be considered due diligence in one case, might be construed as gross neglect in the case of more valuable or perishable goods.

Consignments to be Kept Separate.—It is a fundamental requirement and of the very essence of the factor relationship, that the principal’s goods must be kept distinct from all other goods in the factor’s possession. This applies not only to the consigned goods as such, but also to the assets received by the factor upon the sale of such goods—as cash, accounts and notes receivable, etc. To satisfy this latter requirement it is usually held that actual separation is not necessary, but that it is sufficient to record these properties in such a manner that they can always be separated if the need arises. The principal’s properties are held in trust for him by the factor but are subject to the legitimate claims of the factor.

Expenses Charged against Consignment.—Barring specific instructions to the contrary, the factor may incur certain expenses necessary to safeguard the interest of his principal and to effect the sale of his goods. These include such items as freight, insurance, duty, handling charges, allowances and rebates to customers for unsatisfactory goods, etc. All these are proper charges against the consignment, i.e., against the principal.

Factor’s Lien on Consigned Goods.—For any legitimate expenses incurred and for any payments made the principal in advance of the settlement date, the factor has a lien on the consigned goods. It has been held in some cases that the factor has the right to sell the goods in satisfaction of the lien, and if the proceeds of the sale are not sufficient to satisfy the factor’s claims against the principal, the latter is liable for the amount of the deficiency. The factor’s commission from the principal is also protected by this lien and, if necessary, the factor may apply part or all the proceeds of the sale toward the payment of his commission. A lien, of course, is binding only so long as the goods are in the factor’s possession.

Account Sales.—Upon completion of his service the factor must make a strict accounting of his transactions to the principal. In case of dispute he can be required to open to the inspection of the principal his records covering the consignment dealings. The usual method of settlement is by means of an “account sales” rendered by the factor to his principal. The account sales is a summarized statement of all transactions connected with a particular consignment. It constitutes the formal accounting for the consignment transaction. It must show the amount or quantity of goods received, the sales made, and the expenses incurred, the balance being the amount due the principal. This amount may be either remitted or credited to the principal’s account, according to the contract between them. The usual form of account sales is shown in Form 44.

Goods may be billed to the factor at cost, at the current market price, or at some fictitious figure. This billing price does not enter into the accounting of the factor at all. It is the selling price of the factor which is the basis of income against which expenses are charged. The principal may indicate a selling price for his goods but this serves merely as a guide to the factor as to the price desired. If, however, the principal gives specific instruction as to sale price, the agent must govern himself accordingly.

Compensation of Factor.—The factor usually receives his compensation on a commission basis—so many per cent of the sales he makes. When the contract makes specific provision for it, he may sell the goods at a higher price than that fixed by the principal and retain part or all of the excess as compensation.

“Del Credere” Agency.—Where a factor sells on credit, the accounts belong to the principal and any loss through uncollectible accounts is borne by the latter. Sometimes the factor guarantees the collection of all accounts; in this case he is known as a “del credere” agent and receives additional compensation for assuming this risk. Such a guarantee really amounts to a sale of the accounts to the factor.

Advantages of Consignments.—While the practice of consignment trading is not so prevalent now as it was formerly, it still prevails in some lines and under certain conditions. Shippers to the produce market frequently consign their goods to city brokers whom they instruct to take advantage of the prices prevailing in the open market, and in this way they may realize higher prices than when they sell outright to the wholesaler. The consignment shipment has another advantage to the shipper, in that the title to the goods remains vested in him; hence a consignment is safer than a sale on credit to a consignee unless his rating is satisfactory. The practice of consignment trading is of sufficient importance to require a discussion of the accounting principles involved. These will be given first from the viewpoint of the consignor, and then from that of the consignee.

The Consignor’s Entries.—The chief interest of the consignor lies in the net outcome of each sale in order to determine the advantage, if any, of the consignment policy over a straight sale policy. To accomplish this, he must keep a separate account with each consignment, either on the general ledger or on a subsidiary ledger with a total summary account on the general ledger. When the consignor sends the goods, whether they be invoiced at cost, sale, or some other price, entry should not be made direct to his Sales account, for no sale has been made as yet. He has merely placed some of his stock in another market, being still the owner of the goods.

Two Methods of Entering Sales on Consignor’s Books.—There are two ways of recording correctly a consignment on the consignor’s books at the time the goods are sent. According to one method, the goods are transferred from Purchases to another merchandise account, having for its title the word “Consignment,” followed usually by the name of the consignee and the number of the particular consignment made to him, as “Consignment No. 4, J. B. Arscott.” To this account are charged not only the goods at cost price but also all expenses of the transfer, as freight, duty, insurance, etc., the corresponding credits being to Cash or to Purchases as the case may require. This is the only record made, until the account sales is received from the factor. Upon the receipt of the account sales, the Consignment account may either be credited with the net proceeds or be charged with the expenses and credited with the gross sales, as shown in the account sales. If the money is remitted by the factor the Cash account is debited; otherwise the factor’s account is debited for the net proceeds.

The Consignment account is now a true proprietorship account, showing income on the one side and cost of that income on the other side. The difference is either a profit or a loss according as the balance is a credit or a debit. In order readily to distinguish complete consignment transactions from those only partially completed, it is best to close the completed accounts by a transfer of the balance to a “Consignments Profit and Loss” account where it is held until the close of a fiscal period, at which time it is carried to the general profit and loss.

The second method of recording the transaction at the time of sending the consignment is to set up two memorandum accounts, Consignment and Consignment-Out (or Consignment Sales), debiting and crediting these respectively with the invoiced value of the consigned goods. In this case there is no credit to the Purchases account as under the first method given above. Any expenses incurred are charged to the regular expense accounts instead of to the Consignment account. For handling the consignment shipments no special books are required, original entry being in the general journal. If there are many such transactions, however, a special column in the sales journal or a special consignments-out journal is desirable.

Upon receipt of the account sales, the regular sales account is credited either with the net or with the gross proceeds; and the other accounts—as cash, the consignee, and expenses—are debited according to the manner of booking as explained in connection with the first method.

The two memorandum accounts, having served their purpose of calling attention to the fact that some goods have been sent to other markets for sale, should now be canceled by a reversing entry, since the goods have been sold and the record of their sale has been made in the regular sales account. The effect of this second method is to merge consignment and regular sales transactions into one record, making impossible a separate showing of the profit or loss on consignments. The particular method to be used, therefore, will depend upon the information desired.

Consignor’s Inventory.—If the consignor’s fiscal period closes before an account sales in full settlement is received, and if accounting treatment is by the first method, the goods shown in the Consignment account are included in the inventory of goods on hand and so represented in the balance sheet. If the second method is used, the Consignment and Consignment-Out accounts are both omitted from the balance sheet, being merely canceling memorandum entries, and the unsold portion of the consigned goods are included in the inventory. In determining the value of consigned goods, the expenses incurred in sending the goods to the new market may properly be included as a part of the cost.

The Consignee’s Entries—First Method.—Two methods of making entries on the consignee’s books at the time of receipt of goods are used. In the first method, two memorandum accounts, Consignments and Consignments-In, are set up, Consignments being debited for the billed value of the goods received, and Consignments-In being credited for the same item. The purpose of these accounts is merely to set up on the general books a reminder of the transaction.

A third account, John Doe, Principal, is used for current record. This account is charged with the expenses incurred in connection with the consignment and is credited with the sales made therefrom; it is charged also with the consignee’s commission. The balance of the account is, at the completion of the sale, the amount due the consignor, Doe. When this is paid, the account is closed by a debit to John Doe, Principal, and a credit to Cash or Notes Payable. So long as the balance is unpaid, the account, John Doe, Principal, shows the factor’s liability to his principal. This is a special kind of liability, that of a trustee, which is indicated by the inclusion of the word “Principal” in the account title; in case of insolvency a portion of the assets equal to the balance of John Doe, Principal’s account belongs to John Doe and, unless merged beyond possibility of separation, must be so treated. When the sale has been completed, the memorandum accounts, Consignments and Consignments-In, are canceled against each other, having served their purpose.

The Consignee’s Entries—Second Method.—Under the second method, instead of an entry on the general books, the receipt of the goods is recorded in a blotter or memorandum book of consignments received, in which are entered all essential data, covering the name of consignor, quantity, price, legend or distinguishing marks, etc. Expenses incurred are charged to John Doe, Consignment account on the general books, and sales are credited to the same account. Settlement is made as with John Doe, Principal, as explained above, except that when the balance is not paid it frequently is transferred to a simple John Doe personal account, where so far as account title is concerned it loses its character as a trust account and is merged with all other creditors.

Consignments Must Have Distinguishing Marks.—In making his sales from the various consignments, the factor must be careful to record them in a way to distinguish the goods taken from different consignments. This is particularly true of sales on account, for if the accounts prove uncollectible it is important to know to which lot the loss must be charged. This is accomplished by recording the consignment legend or mark with the sale.

Factor’s Books at Close of Fiscal Period.—When the factor’s books are closed, the commissions earned to date on consignment sales, whether the entire consignment transaction is fully or only partially completed, should be taken into account. Commissions earned on completed consignments should already be on the books as debits to the various principals’ accounts and credits to “Commissions Earned.” The commissions on incomplete consignments are brought on the books by entry of the accrued income in the Commissions Earned account, the amount being based on the sales made from the incompleted consignments during the period. The accounts with these incomplete consignments may show either debit or credit balances. If a debit balance is shown, the account is an asset representing the consignee’s claim against his principal for expenses incurred in excess of sales made. If a credit balance is shown, the account represents a trust liability as above. At a closing time the memorandum accounts of incomplete transactions should be adjusted to their present inventory values.

Consignee’s Inventory.—Just as the consignor must be careful to include in his inventory all goods out on consignment, so the consignee must be equally careful to exclude from his inventory all goods of his principal’s still unsold and in his possession.

Illustrative Entries on Consignor’s and Consignee’s Books.—An illustration of a simple consignment transaction from the viewpoint of both consignor and consignee is given below. It is assumed that a consignment transaction takes place between J. J. Querles and I. M. Factor as follows:

Decision as to which of the two accounting methods should be used must be made according to the information desired by the principal. Where consignment transactions are a side line, the record is usually kept by the first method which shows the profit or the loss on each transaction and thus furnishes valuable information for executives. This is sometimes called the occasional consignment theory or method. Where the consignment transaction is the usual method of effecting sales, the second method illustrated above is generally to be followed, because by this method all consignment transactions are properly included in the regular sales and expense records.