In a perfect consignment setting – consigned goods should never have been recorded as accounts receivable as they are still in fact own by the company. However, if the company erroneously recorded the consigned goods as sales, it will debit a big chunk of sales (Dr-A/R and Cr-Sales), and then, when the consignee sends payment for the sold goods, the company records it as credit to AR.
Think it this way, let's says you manufacture 100 Christmas stockings at cost $1 and you want NotWalimart to sell it for $20, but pay you only $10. NotWali maybe incline to sell them at the big profit for them, but they don't know if your product will sell so they don't want to pay for it offhand. You will make arrangement to deliver all 100 stockings for NotWali to sell. This is not a sell for you yet, as you still own it. NotWali is just staging it for you to sell in their store. The correct entry would have been
Dr Inventory-NotWali $100
Cr Inventory-Warehouse $100
But if you record it as a sell – erroneously which the auditor caught 🙂 Your entry will look like this
Dr AR $1000
Cr Sales $1000
Dr COS $100
Cr Inventory $100
Then, Let's say NotWali sold 10 stockings a week, and send you the money in a weekly basis, you record the payments as follows:
Week 1 Dr Cash $100
Cr AR $100
Week 2 Dr Cash $100
Cr AR $100
Week 3 Dr Cash $100
Cr AR $100
You see the trend here. Periodic payment instead of paying for the entire $1000 in one payment. Had NotWaliMart agreed to buy the entire 100 stockings, they would normally have paid $1000 as one payment.
AUD - 91
BEC - 82
FAR - 84
REG - 88
”Success at anything will always come down to this: focus & effort. And we control both...” ~ The Rock