What it means
In an ordinary sale, the supplier delivers goods, invoices them, transfers ownership and risk, and is paid by the customer whether or not the customer sells them on. In a consignment, the supplier delivers goods and keeps them: the customer holds them as an agent, sells them (or uses them in production), and remits the agreed price for what was sold, keeping its margin or commission.
The unsold goods remain the supplier's, at the supplier's risk of obsolescence and, usually, of loss, and the supplier can recall them. The commercial logic differs for each side.
For the consignee, consignment removes the working capital and risk of holding stock: the shelves are full without cash outlay, unsold goods cost nothing, and new or uncertain products can be tried without commitment. For the consignor, consignment gets its product onto the shelves or into the customer's plant that would not otherwise stock it, secures the customer's supply and often exclusivity, and gives visibility of actual demand; the costs are the working capital tied up in stock at the customer's premises, the risk of loss and obsolescence, and the dependence on the consignee's honesty and record-keeping.
The accounting follows ownership. The consignor keeps consigned goods in its inventory, usually in a separate account (inventory on consignment), at cost, and recognises revenue when the consignee sells to the end customer (or uses the goods), at which point the consignor invoices the consignee and records cost of sales.
The consignee records no inventory and no payable for goods held; when it sells, it records its revenue (the full price, if it is a principal, or its commission, if it is an agent) and its cost or the amount due to the consignor. Under current revenue standards, consignment is an explicit example of an arrangement in which control has not passed, so the consignor cannot recognise revenue on delivery, and the indicators (the supplier controls the goods until sale, can require their return, and the consignee has no unconditional obligation to pay) are set out in the standards.
Controls are the practical difficulty. The consignor's stock is in someone else's building; the consignor depends on the consignee's reports of sales and on its own counts to know what remains.
Good arrangements specify reporting frequency, the consignee's obligation to keep the goods identifiable and insured, the consignor's right to inspect and count, the treatment of damaged or lost goods, and the timing of payment after sale. Consignors reconcile their consignment inventory regularly (goods shipped, less goods sold and returned, equals goods that should be there) and count at the consignee's premises.
Consignees must keep consigned goods separate in their systems so that they are not counted as the consignee's own inventory or, worse, sold and not reported. Tax and legal points follow ownership too: sales tax is usually due when the consignee sells to the end customer; the consignor may have a taxable presence where its goods are held; and in the consignee's insolvency, the consignor's goods are, in principle, the consignor's to recover, provided they can be identified, which is why the labelling and record-keeping matter.
In practice
Real-world examples.
Example
A hospital holds orthopaedic implants on consignment from three manufacturers, paying for each only when it is used in surgery, with the manufacturers counting monthly.
Example
A bookshop takes new titles on sale-or-return consignment, returning unsold copies after ninety days.
Example
A component supplier keeps a stock of fasteners in a customer's factory under vendor-managed inventory, invoicing weekly for what the customer has drawn.
Think of it
“Consignment inventory is stock you're holding but don't own yet-you pay only when you sell it.
Formula
Calculation
Consignor's inventory on consignment = Goods shipped to consignees at cost minus Goods sold (at cost) minus Goods returned minus Goods lost or written off
Consignor revenue (period) = Consignee's reported sales x Consignor's price (or Net proceeds after consignee's commission, where the consignee is an agent)
Consignee's obligation to consignor = Sales of consigned goods in the period x Agreed price, payable per the terms
Worked example. A furniture manufacturer places goods on consignment with a retailer. In the quarter:
- Goods shipped to the retailer: 120 sofas at a cost of $600 each ($72,000), to be sold at a retail price of $1,500, with the retailer remitting $1,000 per sofa sold and keeping $500
- Sold by the retailer during the quarter: 85 sofas
- Returned to the manufacturer (discontinued fabric): 10 sofas
- Damaged in the retailer's warehouse (the agreement makes the retailer liable at the manufacturer's price): 2 sofas
- On hand at the retailer at quarter end: 23 sofas (120 minus 85 minus 10 minus 2)
Manufacturer's accounting:
- On shipment: transfer 120 x $600 = $72,000 from finished goods to inventory on consignment. No revenue.
- On sale (per the retailer's monthly reports): revenue 85 x $1,000 = $85,000; cost of sales 85 x $600 = $51,000; gross profit $34,000; receivable from the retailer $85,000
- On return: transfer 10 x $600 = $6,000 back to finished goods
- Damaged: invoice the retailer 2 x $1,000 = $2,000; cost of sales $1,200; the retailer bears the loss
- Inventory on consignment at quarter end: 23 x $600 = $13,800, confirmed by a count at the retailer's warehouse
Retailer's accounting:
- On receipt: no entry (memorandum record of 120 sofas held on consignment)
- On sale: revenue 85 x $1,500 = $127,500 (the retailer sells as principal, setting the price and bearing the customer relationship); cost of sales 85 x $1,000 = $85,000; gross profit $42,500; payable to the manufacturer $85,000
- Damaged: expense $2,000 (or a claim on its insurer)
- Balance sheet: no consignment inventory; the 23 sofas are excluded from its stock count and its inventory valuation
Working capital comparison: had the retailer bought the 120 sofas outright at $1,000, it would have paid $120,000 (say on 30-day terms) and carried $35,000 of unsold stock at quarter end, with the risk of the discontinued fabric. Under consignment it paid $85,000 for what it sold and carried nothing. The manufacturer, conversely, carries $13,800 of stock at the retailer's premises plus the $85,000 receivable, against an outright sale that would have converted the whole $72,000 of cost into a $120,000 receivable on shipment. The manufacturer accepted the consignment terms because the retailer would not otherwise have stocked the range; its analysis showed that the working capital cost (about $25,000 tied up on average at 8%, $2,000 a year) was small against the $34,000 of quarterly gross profit from a channel it did not otherwise have.
Reconciliation at quarter end: shipped 120; sold 85; returned 10; damaged 2; expected on hand 23; counted 23. Agreed. Had the count found 20, the manufacturer would have invoiced the retailer for 3 sofas under the loss clause and investigated the retailer's sales reporting.Case study
Seen in the real world.
A manufacturer of garden machinery supplied 200 dealers on consignment, with dealers reporting sales monthly and the manufacturer invoicing accordingly. Its consignment inventory on the balance sheet was $9,000,000 and had not been physically verified for two years because counting 200 sites was expensive. An auditor's sample count of twenty dealers found that eleven held less than the manufacturer's records showed, by a total of $210,000: some had sold machines and not reported them (using the cash for other purposes), some had transferred machines between branches, and one had gone out of business with $60,000 of machines that the liquidator had sold as the dealer's own because they were not labelled.
Extrapolated, the shortfall across all dealers was about $2,000,000, and the manufacturer wrote it off. The new procedure required serial-number reporting through a dealer portal, weekly rather than monthly reporting, physical labels on every machine identifying the manufacturer as owner, a rotating count of all dealers each year, an insurance requirement on dealers, and a charge to any dealer whose count fell short.
The following year's count found shortages of $40,000. The finance director's report to the board observed that the company had known where its $9,000,000 was on paper and had not looked at it in person, and that consignment stock is only as real as the last count.
Watch out
Common mistakes.
- The consignor recognising revenue on shipment to the consignee. Control has not passed; revenue arises only on sale to the end customer or use by the consignee.
- The consignee including consigned goods in its own inventory, which overstates its assets and, if it then sells without reporting, converts the consignor's goods into the consignee's cash.
- Failing to count consignment stock at the consignee's premises, which allows unreported sales, transfers and losses to accumulate unseen.
Questions
People also ask.
What is the difference between consignment and sale or return?
Sale or return usually transfers title on delivery with a right to return unsold goods; consignment keeps title with the supplier until sale. Accounting under current standards looks at control rather than labels, and both are treated as no sale until the return right lapses or the goods are sold on.
Who bears the risk of loss or damage to consigned goods?
By default the owner, the consignor; but agreements commonly make the consignee liable for goods in its custody and require insurance. The contract should say.
How does the consignor protect its goods if the consignee becomes insolvent?
By keeping the goods identifiable as its own (labels, serial numbers, segregated storage) and by a written agreement establishing its ownership. Unidentifiable goods may be treated as the consignee's assets.
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