CONSIGNMENT TRANSACTIONS

Created by Erika Go, Modified on Tue, 12 Nov, 2024 at 5:37 PM by Erika Go

A2000 ONLINE SUPPORT DEPARTMENT

KNOWLEDGE BASE
Description: How can we handle Consignment Transactions?

1. CONSIGNMENT - SALES

Consignment stocks are products handed over to customers, and not invoiced to them until it is consumed. As the title of the products has not transfer to the customer, these are still inventory that belong to the company.

It is necessary to track the quantities and value at any given point of time at all the consignment customers. Consignment sales are usually implemented as stock transfer to a customer location.

To perform Consignment Sales; the steps are:-

1.1 CREATE CONSIGNMENT CUSTOMER LOCATIONS

To create a Consignment Customer Location (or Warehouse) code for the consignment sales customer, use the Create Warehouse Location function found under Inventory – Product Management à Create Warehouse Locations.

1.2 ISSUE STOCKS FOR CONSIGNMENT

When a consignment order is raised for a customer, the goods are dispatched via a Stock Transfer note, as title of the goods are not passed to the customer. The goods are transferred from Company Warehouse to Consignment Customer Warehouse.

SALES OR LOANS - while most consignment good are for the purpose of sales, it may also be used to loan out product or equipment to customers.

REPORT - over a period of time, you may consign multiple batches of stock to the customer. The total quantity and value of these inventory on consignment can be viewed in Stock Valuation Report (by Warehouse Locations)

1.3 CONSIGNMENT RETURNS

It is also possible that consignment customer returns un-sold products to the company or a loan product may be returned. In this way, a Stock Transfer is executed, where the product moves back from Customer Location back to Company Location.

1.4 CONSIGNMENT BILLING

At the end of an agreed period, there will be a stock count at the customer location for what is left at their location. The amount consumed would be the billable quantities the company needs to raise an invoice to the consignment customer.

When raising an invoice, user will cut the stock via the Consignment Customer warehouse location. Stocks will be depleted at the consignment location and the Stock Valuation report will show a corresponding decrease in quantities.

1.5 CAN WE USE DELIVERY ORDERS OR INVOICE TO HANDLE ONSIGNMENTS?

Technically yes. Practically no.

If you use delivery orders, the effect is stocks are issued out of inventory. They will hit your P&L for the period the goods are on consignment. You will overstate your losses.

If you use an invoice, the effect of stocks issued out of inventory (hitting the P&L) will be mitigated with a sales amount. This will overstate your profits, and at the same time will hit your cash flow as you are subjected to making payments for the output GST/VAT. This is not ideal for proper reporting.

2. CONSIGNMENT PURCHASE

Supplier consigns stocks to you and do not bill you till they are sold. Following cases detail how we can account for these transactions; for stock, profits and payable to supplier:

2.1 MAKE USE NEGATIVE STOCKS WITH RECALCULATION

Create new Product Codes for items consigned to you - stock items with weighted average costing and since FIFO method do not allow negative stocks.

Sell these items as they are. Since the suppliers have not billed you, the products will go into negative quantities.

When supplier performs a stock count, they will then invoice you for consumed quantities. Book in the quantities that are billed and the negative stocks will be neutralized. Ensure that the date of incoming stock is on/before the sales date.

If supplier bills you with a detailed product invoice, enter these under a Supplier Credit Invoice (SI transaction type), and it will recognize the incoming inventory, input tax and accounts payable.

If the supplier bills you with a lump sum without line item quantities, then this method is not workable. You should make use of Service Items to handle the consignment purchases instead of stock items. See Para 2.3.

IMPORTANT NOTE: The stock ledger will go wrong with all the costing, because of the deliberate negative stock situation. After neutralizing the negative stocks, perform a Recalculate Stock Cost to get the stock cost refreshed to correct level.

2.2 MAKE USE OF NEGATIVE STOCKS WITH STANDARD COSTING

Create new Product Codes for items consigned to you – as stock items with Standard Costing, where the cost of every product is pre-determined.

Sell these items as they are. Since the suppliers have not billed you, the products will go into negative quantities.

When supplier performs a stock count, and invoice you for consumed quantities, book in the quantities billed and the negative stocks will be neutralized. Ensure that the date of incoming stock is on/before the sales date.

Because of Standard Costing, the Stock Ledger will be based on the standard cost, and will not go wrong due to the negative stock situation. There is no need to perform any Recalculate Stock Cost.

2.3 MAKE USE OF SERVICE ITEMS

Create new Product Codes for items consigned to you – as service items with no need for any stock costing. Sell these items as they are. As Service Items, there are no impacts to stock. All your products will be booked as 100% gross profit

After the supplier performs a stock count, they will invoice you for consumed quantities. Book in the quantities that are billed and capture the Payables amount, and they will be treated as 100% cost of goods sold.

The differences of the sales amount and cost of sales will be the profit for these consignment sales.

* END *

* END

Disclaimer: The information provided here is provided on an as-is basis without warranty of any kind, either expressed or implied, including warranties of merchantability and fitness for a particular purpose. In no events shall A2000 Solutions Pte Ltd or its agents, distributors and suppliers (collectively known as A2000) be liable for any damages whatsoever including direct, indirect, incidental, consequential, loss of business profits or special damages, even if A2000 have been advised of the possibility of such damages. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. All third party trademarks are the property of their respective owners.