PROFITIZE Case Study: How TechCo Recorded the Sale of Finished Goods as an Agent for a Consignor

Introduction:

TechCo, the company that manufactures electronic gadgets, acted as an agent (consignor) for another company (the consignor) to help sell their finished goods. TechCo earned a commission for facilitating the sale and was responsible for collecting VAT from the buyer.

The Situation:

TechCo facilitated the sale of 500 units of finished goods on behalf of another company (the consignor). Each unit was sold for $100. The total sale amount before VAT was $50,000. The buyer was required to pay an additional 10% VAT, which amounted to $5,000. Therefore, the total amount paid by the buyer was $55,000.

Upon delivery of the goods, TechCo collected the full payment of $55,000. TechCo earned a 10% commission on the pre-tax sale, which amounted to $5,000. Additionally, the VAT collected was $500.

Case Facts:

• Number of units sold: 500

• Price per unit: $100

• Total sales (before VAT): $50,000

• VAT (10% on sales): $5,000

• Total amount paid by the buyer: $55,000

• TechCo's commission (10% of pre-tax sales): $5,000

• VAT collected by TechCo: $500 (since the commission of $5,000 attracts 10% VAT)

  
  

IFRS Journal Entries

Based on the provided journal entries, here's how TechCo would record the transactions:

1. When TechCo receives the total payment (including VAT):

   • Debit: Cash for $55,000.00

   • Credit: Accounts Payable (A/P) - Due to Consignor - Consignment Sale - Finished Goods for $55,000.00

     • This entry recognizes the full amount received from the customer, which includes the amount owed to the consignor.

2. Recording the commission earned by TechCo:

   • Debit: Accounts Receivable (A/R) - Due from Consignor - Consignment Sale - Finished Goods - Sales Commission for $5,500.00

     • This entry records the commission earned by TechCo from the sale, including VAT.

   • Credit: Sales Commission - Consignment Sale - Finished Goods for $5,000.00

     • This entry records the commission revenue earned by TechCo.

   • Credit: A/P - VAT - Output Tax for $500.00

     • This entry records the VAT liability on the commission earned by TechCo.

Explanation:

1. Cash (Debit): This increases TechCo’s cash by the full amount received from the customer.

2. Accounts Payable - Due to Consignor (Credit): This represents the amount TechCo owes to the consignor (the company that owns the goods).

3. Accounts Receivable - Due from Consignor (Debit): This represents the commission TechCo expects to receive from the consignor, including VAT.

4. Sales Commission (Credit): This records the commission revenue that TechCo earns from facilitating the sale.

5. VAT - Output Tax (Credit): This records the VAT that TechCo needs to pay to the government based on the commission it earned.

Conclusion:

This case study shows how TechCo, acting as an agent, records the consignment sale by recording the cash received, the amount owed to the consignor, and the commission income. The VAT collected on the commission is also recorded as a liability, reflecting the amount TechCo must remit to the tax authorities. This process ensures that all aspects of the transaction are accurately reflected in TechCo’s financial records.

Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.