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ILLUSTRATIVE ENTRIES FOR CONSIGNMENTS TO BRANCHES.

1. A sales branch operating on the consignment basis may receive its remuneration1 in the form of either a commission on sales or a profit. Under the former method of remuneration, branch profit is determined by fixing commission rates; under the latter, by fixing inter-branch billing prices. In many respects the fixing of commission rates is simpler than the fixing of prices. Commission rates are relatively stable though prices fluctuate widely. The reasonableness of commission rates, moreover, may be more readily tested by comparative data available within the country in which a branch is located without enquiring into foreign costs or profits. For these and other reasons the use of the commission basis of remuneration has been recommended.

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THE COMMISSION BASIS.

2. Although no one series of entries would be suitable for all cases, some entries are given below to illustrate one method of recording transactions with a branch operating on a commission basis. These entries should be regarded merely as illustrations and not as models to be uniformly followed.

3. (1) Entries for the transfer of merchandise from home office to a branch:

(a) On the home office books:

   
Consigned goods: branch X (at cost)  xx 
Inventory of finished goods  xx 

This entry shows that the goods are now located at branch X, but it does not involve the taking up of any profit on the books of the manufacturing division.

(b) On the branch books:

A record showing the quantities and kinds of goods received is sufficient. No formal entry is necessary, but, if desired, one could be made as follows:

   
Inventory of consigned goods  xx 
Consignments from home office  xx 

The value used in this entry would almost of necessity be the anticipated selling price, since there would be no inter-branch billing price and the branch would not know production costs.

4. Under a commission plan, Customs duties and transportation charges paid by a branch would ordinarily be chargeable to the home office, since the latter is presumed to retain the ownership of the goods. The payment of such charges by the branch would be recorded as follows:

   
Home office current  xx 
Cash  xx 

5. No entry would appear on the home office books until the account sales is received.

6. (2) Entries for branch sales and collections:

(a) On home office books: no entries;

(b) On branch books:

As sales are made they might be recorded as follows:

             
Accounts receivable  xx 
Home office current  xx 
Commissions earned  xx 
Other entries are, of course, permissible. 
Collections would be recorded in the regular way: 
Cash  xx 
Accounts receivable  xx 

7. (3) Entries for the account sales or report from branch to home office:

(a) On the home office books:

Periodically the home office would receive a report from the branch showing merchandise received, sales made, merchandise on hand, expenses paid, commissions earned, and other information relative to the consignment business of the branch. From such a report the following entry might be made:

       
Branch X current (for the net amount due on goods sold).  xx 
Branch commissions and expense (for commission at the agreed rate, and for expenses incurred by the branch for the benefit of the home office)  xx 
Consigned goods: branch X (for Customs duties and transportation charges paid by the branch on consigned goods)  xx 
Branch sales (for the full amount realised by the branch).  xx 

8. By means of this entry a complete record of the income and expense relating specifically to goods sold by branch X is placed on the home office books. The purpose of the debit to “consigned goods: branch X” is to raise the carrying value of the inventory to the full delivered cost. The failure to include transportation charges and Customs duties in the inventory value of unsold goods would result in charging too much expense to the current period and too little to the following period.

9. If a cash remittance accompanies the account sales, an entry would be made in the regular way, debiting cash and crediting the branch current account.

10. (b) On branch books:

The rendering of an account sales will necessitate no entry on the branch books unless the proceeds are remitted, or unless a memorandum entry were made in the accounts when the consigned goods were received. A remittance would, of course, be recorded as,

   
Home office current  xx 
Cash  xx 

11. If a memorandum entry were made to show the receipt of the goods, it would now have to be reversed with respect to the goods sold in order to reduce the inventory of consigned goods to the amount actually on hand.

     
Consignments from home office  xx 
Inventory of consigned goods  xx 
(To remove from the consignment accounts the book value of goods sold for the account of the home office.) 

12. (4) Entries for profit realised by home office and branch on the sale of consigned goods.

(a) On home office books:

     
Cost of branch sales  xx 
Consigned goods: branch X  xx 
(To transfer from the inventory account the full, delivered cost of consigned goods sold by branch X. This cost includes Customs duties, transportation charges, etc.) 

13. At the end of a year the accounts relating to the consignment business might be closed as follows:

       
Branch sales  xx 
Cost of branch sales  xx 
Branch commissions and expense  xx 
Profit and loss  xx 

14. The amount of profit thus shown on the home office books would in reality be a gross manufacturing profit — i.e., the net proceeds of sales effected by branches less the cost of the goods sold. If the branch commission rate is comparable to the rates of gross profit currently prevailing in similar businesses, this profit should not differ greatly from the profit which would have been earned on sales in the same volume to independent dealers.

15. (b) On branch books:

       
An entry in the following form would record the profit of the branch: 
Commissions earned  xx 
Expenses (in detail)  xx 
Profit and loss  xx 

16. It should be noted that the problem of inventory valuation does not enter into the determination of branch profit. Losses or gains due to price fluctuations are assigned to the home office.

THE CONSIGNMENT BASIS WITHOUT COMMISSIONS.

17. Goods may be handled by sales branches on a consignment basis, even though branch remuneration takes the form of a profit on sales rather than a commission. Under this plan, inter-branch billing prices must be determined by the methods used for arriving at proper billing prices to branches which “buy” the product from the home office or other branch. Consignments handled on this basis as a matter of fact are the same as outright purchases, except that no manufacturing profit is taken up until the goods are actually sold to outside concerns, and that title to branch inventories is vested directly in the home office which is presumed to be the consignor. Entries for consignments handled in this manner are somewhat different from the entries given above for the commission basis. The entries on the two sets of books might appear as follows:

                         
(a) On the home office books: 
Consigned goods: branch X (at cost)  xx 
Inventory of finished goods  xx 
(Goods consigned to branch X.) 
Branch X current  xx 
Sales to branches  xx 
(To charge branch X at the agreed inter-branch price for goods sold by it.) 
Cost of sales to branches  xx 
Consigned goods: branch X  xx 
(To transfer the cost of goods sold from the inventory of consigned goods.) 
Cash  xx 
Branch X current  xx 
(Remittance from branch.) 

18. A comparison of sales to branches with the corresponding cost of sales will show the gross profit realised by the home office on the goods sold by branches.

(b) On branch books:

                             
Inventory of consigned goods (at inter-branch billing price)  xx 
Consignments from home office  xx 
(Consigned goods received from home office.) 
Inventory of consigned goods  xx 
Cash  xx 
(Customs duties and transportation charges on consigned goods. Assuming that these are to be borne by the branch. If the inter-branch price is the delivered price, these costs should be charged to the home office as they were in the entries for the commission basis.) 
Accounts receivable or cash  xx 
Sales (consigned goods)  xx 
(Sales by the branch to customers.) 
Cost of (consignment) sales  xx 
Inventory of consigned goods  xx 
(To transfer from the inventory account the inter-branch billing price of goods sold plus Customs duties, transportation charges, etc.) 
Consignments from home office  xx 
Home office current  xx 
(To set up the liability to the home office for the inter-branch billing price of goods sold.) 

19. These entries, as would be expected, are quite similar to the entries which would be made if transfers of merchandise to branches were to be treated as sales rather than consignments. The profit of the home office, however, would differ unless unrealised profit in branch inventories were eliminated. If this elimination is made, the method of recording inter-branch transfers as purchases of one branch and sales of the other will produce practically the same profits as the consignment method.

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