[nalratoss]

Can anybody explain to me this:

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client’s goods have been shipped on consignment?

Answer: Large debits to accounts receivable and small periodic credits.

Can anybody explain why?

Why having large debits to AR and small periodic credits is a sign of consignment sales?

[Anonymous]

When consignor shipped inventory to consignee, the inventory ownership is still the consignor's. Correct entry will be just moving from normal inventory account to consigned goods inventory.

Misstatement could happen when the consignor treated the shipment as a sale but at that time, cash is not received, so receivable increased. Of course, consignee will not pay the net proceeds back to the consignor until sale to the customers happen. When the sale to customer happened, usually monthly, the consignee paid the cash net of commission fees and other costs incurred for consignor to the consignor, so the consignor reduced the receivable. The periodic credits could be in large amount or small amount. So if an account receivable has large debits and small PERIODIC credits, it could be consignment. Then the auditor will perform more procedures to move the question mark in his mind. On the other hand, if the debits and credits both are large, it could look like a normal sale and the auditor may not be aware of the consignment. This could happen when the consignment sale turn over very quickly.

[tncpa2018]

In a perfect consignment setting – consigned goods should never have been recorded as accounts receivable as they are still in fact own by the company. However, if the company erroneously recorded the consigned goods as sales, it will debit a big chunk of sales (Dr-A/R and Cr-Sales), and then, when the consignee sends payment for the sold goods, the company records it as credit to AR.

Think it this way, let's says you manufacture 100 Christmas stockings at cost $1 and you want NotWalimart to sell it for $20, but pay you only $10. NotWali maybe incline to sell them at the big profit for them, but they don't know if your product will sell so they don't want to pay for it offhand. You will make arrangement to deliver all 100 stockings for NotWali to sell. This is not a sell for you yet, as you still own it. NotWali is just staging it for you to sell in their store. The correct entry would have been

Dr Inventory-NotWali $100
Cr Inventory-Warehouse $100

But if you record it as a sell – erroneously which the auditor caught 🙂 Your entry will look like this
Dr AR $1000
Cr Sales $1000
Dr COS $100
Cr Inventory $100

Then, Let's say NotWali sold 10 stockings a week, and send you the money in a weekly basis, you record the payments as follows:
Week 1 Dr Cash $100
Cr AR $100

Week 2 Dr Cash $100
Cr AR $100

Week 3 Dr Cash $100
Cr AR $100

You see the trend here. Periodic payment instead of paying for the entire $1000 in one payment. Had NotWaliMart agreed to buy the entire 100 stockings, they would normally have paid $1000 as one payment.

[Author]

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