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unit-12-consignment-accounts-iii

Unit-12 Consignment Accounts-III

Learn how Consignment Account is prepared when the goods are consigned at invoice price and how the necessary adjustments are made.

What do you understand by invoice price? Give reasons for consigning the goods at the invoice price.




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Learning Pundits Content Team

Written on Apr 24, 2019 12:51:22 PM

When the consignor sends goods on consignment to the Consignee, he records it in his books at cost and the same is reflected in the proforma invoice. Sometimes, the consignor does not want the consignee to know the actual cost of goods sent to him, in that case he would consign the goods at a price other than the cost price. Such, price would generally be higher than the cost, It is called the invoice price. In other words the invoice price is equal to the cost price plus a certain amount of profit.

Apart from the intention of not revealing the cost of goods to the consignee there are a number of other reasons why the consignor consigns the goods at invoice price. These are the:

  1. The consignee will not be able to assess the profit earned on consignment and therefore may not demand a higher commission.
  2. If the consignee knows about the actual cost of goods he may resort to some dishonest practices such as buying goods for himself at a lower price and then selling them at a higher price in the market.
  3. It would give a fair idea to the consignee of the minimum price at which he is to sell the goods.

Invoice price is not the same thing as selling price. The invoice price is the price at which the consignor sends the goods to the consignee, whereas the selling price is the price at which the consignee sells the goods to the customers.

Let us take an example in order to clearly understand the difference between the three prices i.e., the cost price, the invoice price and the selling price. Suppose Gopal consigns goods worth Rs. 15,000 to his agent Ashok at an invoice price of Rs. 18,000. Ashok sells the goods at Rs. 20,000. In this example the cost price (CP) of the goods is Rs. 15,000, the invoice price (IP) of the goods is Rs. 18,000, and the selling price (SP) of the goods Rs. 20,000.

You will observe that the IP is higher than CP whereas SP is higher than the CP as well as the IP, and that the SP and the IP are not the same. If, however, the Consignor directs the consignee to sell the goods at invoice price itself, then the SP and the IP will be the same.