All about Goods Sent on Consignment Accounting, Commission, and Account Sales
It is a type of commission which a consignor offers to the consignee who guarantees the collection of payment from credit customers. It is different from the consignee’s ordinary commission and works like a credit insurance to consignor in the event a customer becomes insolvent or fails to make payment due to some other reason. In consignment account, del credere commission appears on the debit side along with the ordinary commission allowed to the consignee. For example, if a seller sells goods to a buyer on credit, they may choose to pay a del credere commission to the buyer’s agent or commission agent. The agent guarantees the payment of the buyer, and in exchange, the seller pays an additional commission. This commission is typically a percentage of the total sale value and is agreed upon by the seller and the agent. Entries related to credit sales A del credere agent is a combination of a salesperson and an insurance firm. It is, in essence, a commission given to an agent in exchange for securing the buyer’s payment. This kind of compensation is often paid by the seller to the agent and is an additional expense for the seller. • Usually, the consignee recovers from the consignor all expenses incurred by him on the consignment. He sends only a “Proforma Invoice”, a statement that looks like an invoice but is really not one. The object of the proforma invoice is only to convey information to the consignee regarding particulars of the goods sent. ‘Proforma invoice’ is sent by the consignor in the form of an invoice to the consignee. Trade consignor is the person or the producer of goods who sends the goods to the consignee or to other agents like a manufacturer or the wholesale dealer. Consignment is done in many cases such as artwork, clothing, accessories, and also to sell books. Because the arrangement had the purpose of fixing competitors’ prices it was held illegal under Sherman Act § 1. The holding in Masonite thus seems to overrule partially the Supreme Court’s earlier holding in United States v. General Electric Co., 272 U.S. 476 (1926). When the owner of a product, or item, wants to put it up for auction, they typically reach terms with an auction house, or auctioneer, to handle the sale. The auction house will then set rules and terms of the auction to potential bidders. If the agent is to be made responsible for bad debts, he is to be paid a commission called del-credere commission. It is calculated on total sales, not merely on credit sales until and unless agreed. A del credere might choose to only work with buyers with a certain credit rating or level of solvency to better ensure they will consistently pay their bills. A del credere agency is a type of principal-agent relationship wherein the agent acts not only as a salesperson, or broker, for the principal, but also as a guarantor of credit extended to the buyer. Example – consignment accounting with and without del credere commission This additional commission when provided to the consignee gives protection to the consignor against bad debts. In other words, after providing the del-credere commission, bad debts are no more the loss of the consignor. It is calculated on total sales unless there is an agreement between the consignor and the consignee to provide it on credit sales only. • For his work, the consignee receives a commission calculated on the basis of the gross sale. For ordinary commission, the consignee is not responsible for any bad debt that may arise. The del credere commission is paid to the buyer’s agent or commission agent in exchange for guaranteeing the payment of the buyer. The agent assumes the credit risk of the buyer and guarantees that the buyer will make the payment. In return for this guarantee, the agent receives an additional commission, which is called the del credere commission. To increase the sale and to encourage the consignee to make credit sales, the consignor provides an additional commission generally known as del-credere commission. The Manufacturers and the Wholesale dealers come in terms of consignment as they find it very profitable to sell their goods through an agent. It is given by the consignor regardless of whether the consignee is making credit sales or not. The agent is not liable to the principal if the third party refuses to carry out the contract, for example if the buyer refuses to take delivery. Consignment Account relates to accounts dealing with such business where one person sends goods to another person on the basis that such goods will be sold on behalf of and at the risk of the former. All about Goods Sent on Consignment – Accounting, Commission, and Account Sales The del credere commission has several benefits for both the seller and the agent. For the seller, the commission provides a what is del credere commission guarantee of payment from the buyer. This can be especially important for sellers who deal with high-risk buyers or buyers who are not creditworthy. The nature of a del credere agency puts the agent in a situation where they have responsibilities connected to both the buyer and seller of the product or service in the transaction. When they sell the service or product, they also guarantee the buyer will pay for it appropriately. On 1st October 2020, Kim of Manchester consigned goods costing $50,000 to Harry of Bristol. On 31 December 2020, an account sales was received from Harry showing that all the goods were sold for $75,000 – out of which, $20,000 were sold on credit. No entry – when del credere commission is allowed to the consignee, the consignor has nothing to do with bad debts. The computation of del credere commission is similar to the computation of ordinary commission. However, the consignor and consignee may sign a separate agreement regarding the calculation and payment of del credere commission. A del credere agency guarantees
