Generally there are two different methods of preparing accounts relating to the consignment of goods. These are (1) Cost Price Method and (2) Invoice Price Method. These two methods are described as under:-
1. Cost Price Method
Under this method, entries relating to consignment in the books of consignor are passed with the actual cost of goods and amount spent or expenses incurred by him.
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2. Invoice Price Method
Invoice price implies when the consigned goods are invoiced at higher than actual cost price. Sometimes the consignor sends a proforma invoice to the consignee. In a proforma invoice goods are generally priced at higher than actual cost say cost plus 20 percent. This may be done with any of the following objectives:-
- Not to disclose actual cost of goods to the consignee.
- Suggesting the consignee a minimum cost price which already includes some profit margin.
- To ensure a minimum amount of profit on consignment.
- To provide for all the expenses and consignee’s commission in the invoice price.
To encourage consignee from starting competing business.