What it means
Under a consignment arrangement, the supplier (called the consignor) delivers goods to another business (the consignee) without selling them outright. Legal title stays with the consignor, so the goods remain on the consignor's balance sheet as inventory even though they are physically somewhere else.
Consignees like the model because it removes the cash outlay and the risk of being stuck with unsold goods. A retailer can display a wider range, a factory can keep critical spare parts on its shelves, and neither has to fund the purchase up front.
The consignee only owes money once an item is sold or drawn from the stock. Suppliers accept the model because it can win shelf space, speed up delivery to the end customer and lock out competitors.
The price is slower cash collection and more risk, since the supplier carries the cost of damaged, lost or obsolete goods until they are sold. Contracts therefore usually cover insurance, stock counts, how long goods may stay unsold and who pays for returns.
The accounting turns on one question: who controls the goods and who bears the risks and rewards? If the consignee can return the goods and has no obligation to pay until they are sold, revenue is recognised by the consignor only at the point of sale by the consignee.
Recognising revenue at the point of delivery would overstate sales and profit. Control is the hard part in practice.
The consignor needs regular reports from the consignee showing opening stock, goods sold and closing stock, and should count the stock physically on a schedule. Without this, the supplier can lose track of its own assets.
A common variant is call-off stock, where a customer agrees to buy the goods but draws them from a supplier-owned stock held on its premises as needed. The difference is that the customer has a firm purchase commitment in that case, so the accounting and the risk sit differently from true consignment.
In practice
Real-world examples
Example 1
A craft brewery places 120 cases of seasonal beer with a restaurant group on consignment. The group pays only for the cases it serves, and the brewery collects any unopened cases at the end of the season. The brewery records no sale until the restaurant reports its usage.
Example 2
A manufacturer of industrial fasteners keeps a cage of its parts inside a car assembly plant. The plant takes parts from the cage as the line needs them and is invoiced weekly for what it used. The manufacturer carries the stock on its balance sheet until each pick is recorded.
Example 3
A fashion designer leaves 60 handbags with a boutique that takes a share of each sale. The designer visits monthly to count the bags, withdraw slow movers and take back anything marked or damaged, because the shop does not insure them.
Think of it
Imagine borrowing clothes from a boutique to try on for a party. You keep them in your wardrobe, but the shop still owns them. You only pay for the dress you actually wear to the event, and you return the rest without spending a penny on them.
Formula
Calculation
Amount owed by consignee = units sold x agreed selling price to the consignee
Closing consignment stock held on the consignor's books = units unsold x cost per unit
A supplier delivers 400 units of equipment to a retailer on consignment. Each unit cost the supplier $50 to make, and the agreed price the retailer pays per unit sold is $80. By month end the retailer has sold 250 units, so it owes 250 x $80 = $20,000. The remaining 150 units are still owned by the supplier and are valued at 150 x $50 = $7,500. The supplier's gross profit for the month is 250 x ($80 - $50) = 250 x $30 = $7,500.Case study
Seen in the real world
Harbour Lane Pantry is an illustrative, fictional food producer that sells jars of sauce to independent grocers. Many grocers declined to buy a full case up front, so Harbour Lane offered 90-day consignment on its first 50 shops.
Sales rose, but cash fell short. The finance manager found that $96,000 of inventory was sitting in shops and still counted as Harbour Lane's own stock, while a fifth of it was close to its date limit.
She introduced a monthly stock report from each shop, a 60-day cap on unsold goods and a rule that expiring jars would be swapped for fresh ones. Over the next two quarters, spoilage fell and the illustrative lesson was that consignment works only when the supplier watches the stock as closely as the shop does.
Watch out
Common mistakes
- Recording a sale and a receivable when goods are delivered to the consignee, even though no sale has happened and the goods can still be returned.
- Taking consignment stock off the supplier's books because it has left the building, when the supplier still owns it and must carry it as inventory.
- Forgetting to insure and count consigned goods, which leaves the supplier exposed to loss or theft that the consignee has no duty to cover.
Questions
People also ask
Who pays if consigned goods are damaged?
That depends on the contract, but unless it says otherwise the owner of the goods, the consignor, usually bears the loss, so agreements often make the consignee responsible for care of the goods.
How is consignment different from a sale on credit?
In a credit sale the buyer owns the goods and owes the price whether or not it resells them, whereas in consignment the buyer owes money only for what it sells.
Is consignment stock good for cash flow?
It helps the consignee, who pays later, but it hurts the consignor, who finances the stock until it sells and may wait longer for payment.