Ordinary commission in consignment

Ordinary commission may be defined as the very basic type of commission in consignment business that consignors pay to consignees at an agreed percentage for the sales realized by them. It can be regarded as the most general and simplest form of consignee’s reward or remuneration because he is only required to generate sales to receive it. He don’t need to assume any responsibility or fulfil any other condition which is often necessary to receive other types of commission form consignor.

Other types of commission that a consignor may allow to his consignee include del credere commission which is paid only if consignee assumes the responsibility of collecting cash from credit customers, and overriding commission which is paid if he achieves certain targets like hitting a specific sales target, realizing a certain sale price and performing extra ordinary promotional activities in specified areas etc.

Formula and journal entry for ordinary commission

Ordinary commission is usually calculated by applying a certain fixed percentage which is agreed upon between consignor and consignee at the commencement of their “principal agent relationship”. We can write the formula as follows:

Ordinary commission = Gross sale proceeds x Percentage of ordinary commission

Regardless of type, consignee’s commission is always treated as consignment expense and hence is debited to consignment account by means of the following journal entry:

Consignment account [Dr]
Consignee account [Cr]

Examples

Example 1

Alpha Company manufactures vintage style clocks. On October 1, 2021, it sent 200 pieces of clocks to Unique Electronics in Mumbai to be sold on consignment basis. On December 31, 2021, the consignee sent an account sales which informed the consignor that 150 pieces were sold at $50 each. The consignee’s ordinary commission was agreed at 20% of gross sales. No del credere or overriding commission was involved in this arrangement.

Required: Compute consignee’s ordinary commission in dollars.

Solution

Total sale proceeds= 150 x $50
= $750

Commission = $750 x 0.20
= $150

Example 2

Mehmood of Jhang sends Ram Deen of Karachi 500 pieces of home made carpets on consignment bases. He agrees to pay an ordinary commission of 30% to Ram Deen on gross sales. After two months of dispatchment, Ram Deen sends an account sales to Mahmood informing him that all the carpets have been sold @ Rs1,000 per piece.

Required: Determine the ordinary commission of Ram Deen. How will Mehmood and Ram Deen treat this commission in their respective books?

Solution:

Ordinary commission of consignee = (Rs500 x 1,000 pieces) x 0.3
= Rs150,000

Mehmood will debit the commission amount to consignment account in his books because the consignee’s commission is treated as consignment expense. The journal entry that he will pass in his books is given below:

Consignment account…..500,000 [Dr]
Ram Deen account…..500,000 [Cr]

For Ram Deen, the commission is an income and he will recognize it in his books by way of making the following journal entry:

Mehmood account…..500,000 [Dr]
Commission received…..500,000 [Cr]