What it means
Consignment suits situations where a retailer does not want to tie up cash in stock it may not sell. Galleries, bookshops, boutiques and some medical device suppliers all use it, and the supplier benefits by gaining access to shelf space and customers.
The key accounting point is ownership. Until a sale takes place to a final customer, the goods remain an asset of the consignor, who includes them in its own inventory, even though they are physically at the consignee's premises.
The consignee does not record the goods as its own inventory or as a liability. It tracks them in memorandum records, records the sale when it occurs, and owes the consignor the proceeds less its agreed commission and any approved expenses.
Costs incurred by the consignor to get the goods to the consignee, such as freight and insurance, are normally added to the cost of the inventory. This means the unit cost of the consigned goods is higher than the original production or purchase cost.
The arrangement shifts risk. The consignor carries the risk of unsold stock, slow sales and price drops, while the consignee avoids financing and obsolescence risk and takes a smaller reward in return.
Good contracts spell out the commission rate, who pays for insurance, how often sales are reported, who bears losses from theft or damage and how unsold goods are returned. Without those terms disputes are common.
In practice
Real-world examples
Example 1
An independent author leaves 30 copies of a book with a local shop. The shop sells 12 and pays the author the price less a 30% commission, while the unsold 18 remain the author's property. The author keeps a simple list of what is where.
Example 2
A medical device company keeps a stock of replacement hips at a hospital. The hospital pays only for the devices actually used in surgery, and the supplier restocks them as needed. The supplier counts the stock each month and invoices only for devices used.
Example 3
A designer places six handbags in a boutique, which displays them for 90 days. The boutique returns the two that did not sell, and the designer keeps them on its books at cost. She decides to try a different shop for the next season.
Think of it
Consignment inventory is stock you're holding but don't own yet-you pay only when you sell it.
Formula
Calculation
Cost of consigned goods = Original cost + Freight and other costs paid by the consignor
Consignor's net profit = Sales proceeds - Commission - Cost of goods sold
A supplier consigns 200 units costing $50 each and pays $600 freight. Cost of consigned goods = (200 x $50) + $600 = $10,600, or $53 per unit. The consignee sells 150 units at $90, so sales are $13,500, and its 10% commission is $1,350. Consignor's cost of goods sold = 150 x $53 = $7,950, so net profit = $13,500 - $1,350 - $7,950 = $4,200. The remaining 50 units stay in the consignor's inventory at 50 x $53 = $2,650.Case study
Seen in the real world
Bayview Pottery is an illustrative, fictional ceramics studio that had previously sold its pieces to shops outright. Many shops refused to buy because they feared being left with unsold items.
The owner switched to consignment with five boutiques, shipping $15,000 of pottery at cost and agreeing a 35% commission. She treated the goods as her own inventory, added shipping to the cost and recorded sales only when the shops reported them.
In this illustrative first year, the boutiques sold $22,000 of her work, kept $7,700 as commission and paid her $14,300. Revenue and shelf presence both improved, though she noticed that tracking stock at five sites took more administration than before, so she introduced a monthly stock count. She also asked each shop to confirm its stock levels in writing each quarter, which gave her an extra layer of comfort.
Watch out
Common mistakes
- Recording consigned goods as sales when they are shipped, which overstates revenue before any customer has bought them.
- Letting the consignee include the goods in its own inventory, which overstates its assets.
- Failing to agree who bears the risk of theft, damage or loss, which causes disputes later.
Questions
People also ask
Who is responsible for insurance on consigned goods?
The contract should say, and in many arrangements the consignor insures the goods, although some consignees carry cover on stock in their premises. Either way, the contract should be explicit.
When does the consignor recognise revenue?
When the consignee sells the goods to the final customer, because control only passes to the end customer at that point.
Is consignment the same as sale or return?
They are similar, but in a sale or return arrangement the buyer usually takes ownership first and may return the goods, whereas in consignment the supplier keeps ownership throughout. This difference affects who records the goods and when revenue is recognised.
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