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Accounting for a small company which is a representative for an overseas company

Please give your advice on this situation. A small US company is in a contract to be a representative for a foreign company. This US company sells consigned products for the overseas company. The overseas company sets selling price and gives a 30% commission to the US company for sales. In particular, the US company receives $100 value of goods and sells all to end users for $100. The sales of $100 then will be sent $70 to the oversea company and kept $30 as commision. The question is which associated accounts should the US company use to record the transactions from the beginning to the end? Thank you for your advice.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anon,

It depends on who bears the risk.
The typical situation is that the inventory / COGS isn't yours, such as in normal consignment. See: http://www.accountingtools.com/consignment-accounting
The opposite situation is that you own the inventory, you sell it, and have an effective COGS of $70, but it sounds like you're in the former situation.

I believe the records for you are (as you go through the process)

Debit AR 100 CR Sales 100
Debit Contra-Sales 70 CR AP 70
Debit Cash 100 CR AR 100
Debit AP 70 CR Cash 70

You end up with $30 in Net Sales, $30 in cash

Cheers,

KP

Anonymous
(Accountant) |

Hi Keith,

Thank you very much for your thoughtful answer. Probably, my knowledge is not there yet to fully understand your answer.

Would you please explain more the purpose of the Contra-Sales account here. Can I just debit directly to Sales instead?
Also, the oversea company will count their total sales is $100 not $70 when they receive cash. Is this right?

Best regards,
Tuan Nguyen

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Tuan,

The Contra Sales account is used for things that *reduce* the sales. On the income sheet you would present Net sales (= sales- contra sales). You can do it directly as a deduction to sales, but I really prefer separate accounts. It is much cleaner in the long term.

The overseas company. It is up to them what they report. If they've got the contract with the customer, it may be completely fair for them to report $100 in sales, then have the $30 be a cost-of-sales deduction (similar to COGS).

Since you are keeping the $30, they'll never get the $100, just the 70, so their transaction would look like:
DR AR $100 CR Sales 100
DR Cost of Sales $30 CR AR $30
then the cash arrives
DR Cash $70 CR AR $70

And you're done.

Anonymous
(Accountant) |

Hi Keith,

Now, it all makes sense to me. Thank you for your best advice and have a nice day to you.

Best regards,
Tuan Nguyen

Anonymous
(Accountant) |

Hi Keith,

There is another concern in this case which relates to international business, particularly the documentation presenting to the Custom of both countries. The oversea company will issue an invoice and packing list for the total value of $100 billed to the US company. If the US company receives this invoice and has to CR AP $100, then there is a gap of $30 later when the US company wires a payment of $70 to the oversea company. Would you please advise me again in this concern. Thank you.

Best regards,
Tuan Nguyen

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Can they NOT issue an invoice that reflects the $30 credit for a net of $70? Another option is for you to issue your own invoice of $30 and wire the $70 to net out the $100 invoice.

Anonymous
(Accountant) |

Hi Emerson,

Thank you for your advice.

They only issue an invoice of $100 to declare with the Custom in their country when they export out the product. They will count in their income the total $100 sales. When they receive the $70, based on the law of their country they are allowed to deduct the $30 as commision to sales agent. I'm not sure how they do on their accounting side. However, on the US company, we have double entry accounting system, I am concerning the gap in AP. Would you please explain more on how to issue my own invoice $30 to off set the gap and which account associates with this move. Thank you.

Best regards,
Tuan Nguyen

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Receipt of Cash from "Sales"
DR Cash $100
CR AP $100

Recognize Commission (or whatever you want to call it)
DR A/R $30
CR Income $30

Apply commission to AR/AP
DR AP $30
CR AR $30

Transmittal of sales collection
DR AP $70
CR Cash $70

This is just another option and this is with the assumption that you are just a "collecting agent" and you do NOT bear the risk from the Sale. Make the T accounts for the aforementioned accounts and you will understand the process and will find out what is left on your books.

Stephen Ettinger
Title: Tax Manager
Company: Epcor USA
(Tax Manager, Epcor USA) |

Keep in mind that in addition to your accounting questions there may be transfer pricing issues to contend with if the two entities in this transaction are related (parent -sub, brother-sister, ...).

Anonymous
(Accountant) |

Hi Emerson,

Thank you for your advice. I follow and work on the T accounts and come to this short version. Please let me know if this works too.
From Sales
Dr Cash $100
Cr AP $100

Recognize Commision
Dr AP $30
Cr Income commision $30

Transfer to Oversea company
Dr AP $70
Cr Cash $70

Net
Dr Cash $30
Cr Commision Income $30

However, when the oversea company first issues an invoice ($100) to the US company together with all manifests (BOL, Invoice, Packing list...) to the Customs, and the US company receives the cargo, should the US company enter the full value of the invoice $100 into accounting software (Quickbooks)? and even the consigned cargo is not inventory of the US company, should the US company put the cargo into inventory in Quickbooks to keep track of in-and-out inventory, or is there a better way to manage this non-inventory consigned cargo?

Also, you mentioned about "NOT bear the risk from the Sale". Would you please explain a little bit on this because the US company is a new start up company and not yet experience on the risk from the Sale. Or, it would help if you have links for related articles.

Thank you again for your advice.

Best regards,
Tuan Nguyen

Anonymous
(Accountant) |

Hi Stephen,

Thank you for your advice. Would you please give some examples or articles for the issues from transfered pricing transaction between related entities, and between non-related entities. This is very useful for a start up company to acknowledge.

Thank you.

Best regards,
Tuan Nguyen

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Tuan,

If you GOOGLE "accounting for consignment inventory in quickbooks", it will turn up several items .

http://www.sleeter.com/blog/2012/05/consignment-goods-with-quickbooks/

http://www.accountingsoftwaresecrets.com/knowledge-base/using-quickbooks/customers-and-receivables/miscellaneous-transactions/ask-expert-0

Quickbooks itself has a help page on how to handle consignment sales --

http://support.quickbooks.intuit.com/support/pages/inproducthelp/Core/QB2K12/ContentPackage/Verticals/Retail/rr_consignment_handling_consignment_sales.html

Anonymous
(Accountant) |

Hi Emerson,

Thank you for your links. They are very useful. They depict all the necessaries for the US company to establishing its accounting and financial system from the very beginning. I will search some more related articles to understand more. Great resources!

Thank you.

Best regards,
Tuan Nguyen

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Hi Tuan,

I realize your focus has been more on the accounting side but I'm afraid the foreign company may run afoul of some serious US tax consequences if the consignment arrangement is not properly documented in an agreement and conducted properly to avoid IRS characterization of this as a US "permanent establishment" taxable business presence, where the foreign company could be liable for income tax in the US on its income earned abroad. The issue depends on whether the consignment is more in the nature of a buy-sell distributor vs. agency arrangement. This risk along with transfer pricing risk applies even more if you are related parties and are too complex to address in a simple question/answer forum like this.

Jake

Anonymous
(Accountant) |

Hi Jake,

Thank you for letting me know about this IRS tax issue which is very important to the international business practice. The US company will act as a sales agent and a non-related party to the oversea company. The US company will sell the products for the oversea company with price arranged by the oversea company, so the nature of the business is an agency arrangement. By chance, would you know some good resources or links for this transfer pricing risk issue, pros and cons of buy-sell distributor vs. agency arrangement. Also, for sure the foreign company does not want any tax issue generated with the IRS. Would you please advise in this case, what and how the two companies should do from the beginning when they establishing a contract.

Thank you.

Best regards,
Tuan Nguyen

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