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In order to find out the exact profit / loss on consignment business, all items in the consignment account should be recorded at actual cost.
 

If certain items are recorded at invoice price, they have to be brought down to cost price and the loading effect should be eliminated.


Thus, when the goods sent on consignment are recorded at invoice price, the goods sent have to be brought down to cost to ascertain actual profit or loss by passing the necessary adjusting entries. Such loading is involved in the following four items:

  • When the goods are sent on consignment
  • When the goods are returned by the consignee
  • Closing stock lying with the consignee
  • Opening stock lying with the consignee

Note: Such entries are passed in the books of consignor only and not in the books of consignee

 

We will try and understand the journal entries for all these four transactions a little later in this chapter. For now, let’s take some illustrations to appreciate the concept of invoice price and loading:

Important Rules to be Followed while Solving the Practical Problems

  • Always use the formula, (Cost price + Loading = Invoice price). Do not use short cut methods.
  • The loading will be dependent either on cost price or on invoice price. Read the question carefully and accordingly apply the formula
  • Step wise presentation is important

Illustration 1

  1. Calculate the invoice price and loading if the goods costing ₹ 400000 are invoiced at 20% above the cost price
  2. Calculate the invoice price and loading if the goods costing ₹ 400000 are invoiced at 20% margin on invoice price
  3. Calculate the cost price and loading if goods of the invoice  value ₹ 500000 has been sent at 25% above the cost
  4. Calculate the cost price and loading if goods of the invoice value ₹ 500000 are sent to show a profit of 10% on invoice price

Solution: 1

Cost Price of the goods sent = ₹ 4,00,000

 

Loading = 20% on cost price

 

Let’s us use the formula: Cost price + Loading = Invoice price

 

Substituting the numbers we get,

 

4,00,000 + 20 % (4,00,000),

 

i.e. 4,00,000 + 80,000 = 4,80,000.

 

Therefore, Invoice price = 4,80,000.

 

Loading = 4,80,000 - 4,00,000 = ₹ 80,000


Solution: 2

Cost Price of the goods sent = ₹ 4,00,000

Loading = 20% on invoice price

Invoice price = x

Let’s us use the formula: Cost price + Loading = Invoice price

Substituting the numbers we get

₹ 4,00,000 + 20% (x) = x

Therefore ‘x’ = ₹ 4,00,000 + 0.20x

Now shift ‘0.20x’ to the LHS, we get

x - 0.20x = ₹ 4,00,000

0.80x = ₹ 4,00,000

x = ₹ 4,00,000 / 0.80 = ₹ 5,00,000

Therefore invoice price of the goods sent = ₹ 5,00,000

Loading = Invoice price – Cost price

= ₹ 5,00,000 – ₹ 4,00,000

= ₹ 1,00,000


Solution: 3

Cost Price of the goods sent = x

Loading = 25% on cost

Invoice price = ₹ 5,00,000

Let’s us use the formula: Cost price + Loading = Invoice price

Substituting the numbers we get

x + 25% (x) = ₹ 5,00,000

1.25x = ₹ 5,00,000

x = ₹ 5,00,000 / 1.25 = ₹ 4,00,000

Therefore, the cost price of the goods sent = ₹ 4,00,000

Loading = Invoice price – Cost price

= ₹ 5,00,000 – ₹ 4,00,000 = ₹ 1,00,000


Solution: 4

Cost Price of the goods sent = x

Loading = 10% on invoice price

Invoice price = ₹ 5,00,000

Let’s us use the formula: Cost price + Loading = Invoice price

Substituting the numbers we get

x + 10% (500000) = ₹ 5,00,000

x + 50000 = ₹ 5,00,000

Therefore,

x = ₹ 5,00,000 – ₹ 50,000 = ₹ 4,50,000

Therefore cost price of the goods sent = ₹ 4,50,000

Loading = Invoice price – Cost price

= ₹ 5,00,000 – ₹ 4,50,000 = ₹ 50,000





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