11. Consignment and the retail merchant.--The re tail merchant should be careful not to overbuy. And yet, too great conservatism may mean that he will not have stock on hand when customers are ready and willing to purchase; this would, of course, mean a heavy loss. He may avoid both of these extremes if he can arrange with a wholesaler or a manufacturer to ship him certain goods on consignment. If this arrangement is made, the consignee is protected in the event of his not being able to find a market for the goods. The consignment method enables even the merchant who does not possess the capital neces sary to purchase the goods outright, to enjoy all the trading advantages of a complete stock of goods.
12. Brokers distinguished from factors.—A broker is an agent who, altho intrusted with the duty of dis posing of goods or property, does not actually hold possession of them. For this reason he has less ap parent authority than a factor. In dealing with a merchandise broker, the purchaser should be on his guard, for the former has no apparent authority to receive payment for goods, and usually has no right to make a sale on credit or to take negotiable instru ments in payment for goods sold. Moreover, he may not warrant the goods.
13. Mill agents.—The so-called mill agent is not an agent at all; he is, in reality, an independent con tractor who agrees to take and sell the entire output of a certain mill or factory. He actually has posses sion of the goods, and title to them as well, since the mill actually sells the goods to the mill agent. In other words, a mill agent is a principal, not an agent.
14. Joint ventures.—Transactions in which con signments are made for a merchant's own account are sometimes called ventures, or single adventures. Similarly, transactions in which the merchant is a co partner with others, are termed joint ventures, or joint accounts. The members of a venture are part ners, but the partnership relation exists only for the carrying out of one or more specified transactions, and terminates as soon as the business has been com pleted. Thus, a merchant may ship goods to an other merchant at another point, to be sold for the joint account of both parties; the second party either furnishes the necessary cash to finance the venture, or perhaps lie may ship to the first party a consignment of goods to be sold by the latter, the proceeds to be shared by both parties. Not infrequently three or more individuals are interested in a transaction of this character. This relationship gives rise to a num ber of complications for several reasons: the contri butions of the different members of the venture may be unequal; the goods exchanged between the parties to the transaction may not all be of the same value ; or the cash capital contributions of the members may be unequal.
15. Accounting procedure in the commission busi ness; general.—The great variety of conditions in the commission business makes it difficult to discuss its accounting procedure except in a general way. In every case, the records of both the consignor and the consignee should reflect exactly the terms of the con tract that binds them both.
Sales made on approval, and the shipment of goods on consignment, must not be entered in the sales ac count until the factor has disposed of the goods; nor can the factor treat the receipt of merchandise sent him on consignment as ordinary purchases would be treated in books of account. Each party must there fore provide the bookkeeping machinery necessary to record such shipments properly. It is common prac tice for business undertakings that are in the habit of consigning merchandise to dealers "on sale or re turn," to treat such transactions in their accounts as if they were actual sales—that is, to charge the ac count of the customer and credit the sales account. When the balance sheet is prepared at the end of the fiscal period the amounts charged to customers are frequently given an arbitrary valuation; for instance, 66 2/3 per cent of the amount of the face value of such approval sales. The sales account is adjusted accordingly.
16. Sales on approval, and allowance for deteriora tion.—Even if the valuations were correct it would not be proper to include sales on approval as valid sales in the income account. It would be as incor rect to state under accounts receivable the amount that appears in the customer's accounts, since no sale has taken place. Moreover, the facts set forth in the bal ance sheet would be misleading.
As long as the goods remain unsold, they should appear as part of the inventory, and should not be carried in the balance sheet under accounts receivable. It is also evident that if the goods consigned consist of clothing or, furs, which are subject to radical changes in style, a further adjustment may be neces sary, owing to the fact that changes in style are likely to affect the price which may subsequently be realized on merchandise as yet unsold. Very often a manu facturer is compelled to make expensive alterations in garments returned to him from the consignees in order to make them fashionable. The consignor should remember that goods sometimes become shop worn while in the hands of consignees, and that their value is affected accordingly. Evidently, the record of the goods still unsold, in the hands of consignees, should be included in the inventory of finished goods. The valuation will depend upon (1) the present mar ket price ; (2) whether or not the goods are subject to changes in style or fashion; (3) whether or not they have deteriorated while in the hands of the con signees.