Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.1  Query:     

Treatment of purchases and sales made by a consignee in the profit and loss account.

 

1. The querist has made reference to query No. 1. 11 published in the Compendium of Opinions, Volume VI, published by the Institute of Chartered Accountants of India, wherein the issue of treatment of commission earned by a consignee is dealt with.

 

2. A company has received certain goods on credit from suppliers and made payments to them only after their sale on the company’s invoices/cash memos. The same has been presented in the annual accounts of the company in the ‘Trading Account’ as ‘Goods purchased on consignment’ and ‘Goods sold on consignment’.

 

3. According to the querist, while the opinion on the above query is noted, in the case of the company referred to in the query, as and when it receives the goods from the suppliers, it determines the price payable for the same. After adding up its usual mark-up, the sale price is arrived at on which they are sold. Similarly, the suppliers are paid only the purchase price at which the transactions are negotiated. In view of this, it is felt there is no commission involved in this transaction.

 

4. However, the above presentation was objected to by Comptroller & Auditor General of India on the basis of the opinion referred to above and the C & AG insisted that the ‘purchase’ and ‘sale’ have been inflated and only the commission aspect should be shown on the credit side of the profit and loss account.

 

5. The querist is of the opinion that the transaction that has taken place in this company has totally different circumstances and it does not fall under the category referred to in the opinion on the above query for the following reasons:

 

(a) The company disclosed the goods received as ‘Consignment Purchase’ and the sales as ‘Consignment Sales’.

 

(b) The sales were effected on the invoices/cash memos of the company but no bills were raised on behalf of the consignor (which is one of the important conditions to term the transaction as consignment sales).

 

6. The querist has also stated that there is no agency-principal relationship between the suppliers and the company. The property in the goods is transferred to the company immediately on the execution of sale on invoice/cash memo of the company.

 

7. The querist has also stated that the title to the goods remains with the supplier till its actual sale by the company and, until such sale, the goods remain with the company in trust as a bailee. On sale these goods are accounted for as “goods purchased on consignment account” and “goods sold on consignment account” to distinguish the same from other sales.

 

8. The querist has also supplied a copy of the standard agreement between the supplier and the company which is given as an annexure.

 

9. The querist has sought the opinion of the Expert Advisory Committee on the presentation of the above transactions in the annual accounts of the company.

 

                                                                Opinion                  December 30, 1992

 

1. The Committee notes paragraph 4.1 of Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, which is reproduced below:

 

“4.1 Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.” [Emphasis supplied by the Committee]

 

2. The Committee notes from the facts of the query that the property in goods received by the company from suppliers does not get transferred to the company at any point of time. The property in goods remains with the supplier till the time the goods are sold by the company and after the sale by the company, the property in goods gets transferred to the buyer of such goods. The Committee also notes that in the agreement supplied by the company, it is stated that the company shall hold the goods supplied by the suppliers as bailee till the time such goods are sold by the company.

 

3. The Committee also notes from the facts of the query that the company remits to the suppliers the invoice price (as agreed to between the company and the suppliers) only after the sales are effected by the company. The Committee is of the view that although the querist has stated that there is no principal-agency relationship between the company and the suppliers, the transactions between the suppliers and company are of a nature that the company is acting on behalf of the suppliers and in substance there is a principal-agency relationship.

 

4. The Committee notes that in a principal-agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration as stated in para 4.1 of AS 9 reproduced above. The Committee is of the view that the company should account for only the difference between the price at which it sells the goods and the invoice price as agreed to with the suppliers, in the profit and loss account.

 

5. The Committee is of the opinion that the accounting treatment followed by the company is not correct. The correct accounting treatment will be to recognise as commission the excess of the selling price over the invoice price as agreed to with the suppliers in the profit and loss account.

 ANNEXURE

Consignment Agreement 

 

This is agreement is made on _________________ at ______________ between ___________ having its office at ____________ (hereinafter called “the consignor” and shall include successors carrying on the business) and the company, having its registered office at Agra (herein after called the ‘Consignee’) on the following terms: -

 

1. Delivery:       The consignor agree to deliver at the premises of the consignee from time to time, such manufactured and other goods indented by consignee. The consignee agrees to accept the said goods according to the terms of this agreement. On receipt of the indent from the consignee, consignor shall ensure supply of goods before the delivery date as indicated on the indent.

 

2. The consignee agrees to keep the goods so delivered to it in such place or places with reasonable care and shall dispose off the stock so consigned to it at a price not less than the invoice price communicated by the consignor and shall sell the goods in the market to the best advantage of consignor. The consignee shall be entitled to appropriate to itself the amount recovered from the purchases exceeding the invoice price.

 

3. Title: The title to the said goods shall remain with the consignor till its actual sale to a purchaser and until such sale, the consignee shall hold the goods as a bailee.

 

4. On the sale of the said goods the consignee will remit to the consignor the invoice price. The amount realised in excess of the invoice price will be appropriated by the consignee.

 

5. Liability to Account: The consignee shall account for all the goods delivered to it and shall also account for the goods sold by it.

 

6. Liability to Supply: The consignor guarantees the supply of goods indented by the consignee once the consignor accepts the indent and any loss incurred till delivery shall be borne by the consignor. Packing & forwarding shall be arranged as indicated in the indent.

 

7.  Period: This agreement shall be for three years. On termination of the agreement, the consignee shall account for all the goods sold by it and deliver the remaining goods to or to the order of the consignor.

 

8. Termination: This agreement can be terminated mutually by consignor and consignee at any time prior to the period fixed for expiry of the same without prejudice to the interest of both the parties.

 

9. Arbitration: If any dispute arises between the parties as to the interpretation of the terms of the agreement or as to the performance or non-performance of the terms thereof or in connection with or arising out of this agreement, the same shall be referred to the Arbitration. The arbitrator will be the Joint Secretary, Ministry of Industry, Government of India or such other person he appoints.

 

In witness whereof the parties aforementioned have executed this agreement who shall be bound thereby in all respects.

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