What it means
When you act as a consignor, you retain full ownership of your merchandise even though it sits in someone else's shop or warehouse. The person selling the items for you is known as the consignee.
Because you still own the stock, it remains listed as an asset on your balance sheet rather than the seller's books. This method matters greatly for cash flow and risk management.
Instead of forcing retailers to buy your inventory upfront, which they might hesitate to do with unproven products, you place the items with them risk-free. You only receive your revenue, minus an agreed commission fee, after the retailer successfully sells the product to an end consumer.
In practical terms, this arrangement requires careful tracking. Since the goods are physically located elsewhere, you need reliable inventory management systems to know exactly how much stock sits with each seller.
If items get damaged or stolen while on display, the exact terms of your consignment agreement determine who absorbs the financial loss. Tax and accounting rules also treat consignment specially.
Revenue cannot be recognised when you ship the goods to the seller. You only record a sale and earn revenue at the exact moment the consignee sells the item to a third-party buyer.
Understanding this timing prevents you from overstating your monthly income. Imagine lending your bicycle to a friend who runs a local repair shop, asking them to display it outside for sale.
You still own the bike, and you only get paid after your friend finds a buyer and takes a small cut for their trouble.
In practice
Real-world examples
Example 1
An artisan candle maker ships fifty handmade candles to a local gift shop. The maker remains the consignor, keeping ownership of the candles until customers buy them from the shop shelves. If 30 candles sell at $20 each and the shop keeps a 25% commission, the maker receives $450 from $600 of sales.
Example 2
A boutique fashion wholesaler sends twenty designer dresses to a regional department store. As the consignor, the wholesaler pays no upfront storage fees and only pays commission upon a retail sale. Dresses that do not sell are collected at the end of the season and offered to another store.
Example 3
An industrial tool manufacturer places specialist equipment in a contractor depot. Acting as the consignor, the company ensures stock is readily available nearby without transferring ownership to the depot. The manufacturer books revenue only when the depot sells or issues an item to a customer.
Think of it
Imagine lending your bicycle to a friend who runs a local repair shop, asking them to display it outside for sale. You still own the bike, and you only get paid after your friend finds a buyer and takes a small cut for their trouble.
Formula
Calculation
Consignor Net Payout = Retail Sale Price minus (Retail Sale Price x Commission Percentage). Consignor revenue is recognised only when the consignee sells to the end customer.
Worked example 1. A consignor's item sells for $100 and the commission is 30%.
- Commission = $100 x 0.30 = $30
- Net payout to the consignor = $100 minus $30 = $70
Worked example 2, with unsold stock. A consignor sends 100 items costing $20 each to a shop, with a retail price of $50 and a 20% commission. By the end of the quarter 60 items have sold.
- Retail sales = 60 x $50 = $3,000
- Commission = $3,000 x 20% = $600
- Net payout to the consignor = $3,000 minus $600 = $2,400
- Cost of the items sold = 60 x $20 = $1,200, so gross profit for the consignor = $2,400 minus $1,200 = $1,200
- The 40 unsold items, worth 40 x $20 = $800 at cost, remain on the consignor's balance sheet as inventoryCase study
Seen in the real world
This is a fictional, illustrative scenario. Artisan Pottery Ltd, a small ceramics studio, wanted to expand its reach by placing tableware in high-end kitchen shops across a large city. Instead of selling the stock wholesale at a heavy discount, the studio registered as a consignor. Studio owner Sarah shipped 100 ceramic bowls to KitchenStyle, a boutique store in Brooklyn.
Under the agreement, KitchenStyle held the stock without paying for it upfront, keeping a 20% commission on any items sold. After three months, sales reports showed that KitchenStyle had sold 60 bowls at $50 each, generating $3,000 in total retail sales. KitchenStyle deducted its 20% commission of $600 and remitted the remaining $2,400 to Artisan Pottery Ltd. This arrangement allowed the studio to showcase its products in a prime retail location without risking large amounts of working capital.
Sarah kept accurate records, ensuring the unsold 40 bowls remained on her balance sheet as inventory until sold in the subsequent quarter. She also checked that her insurance covered stock held off-site, and she reconciled KitchenStyle's monthly sales report against her own count of bowls shipped. Those two habits meant that no revenue was recorded too early and no bowls went missing without a claim being raised.
Watch out
Common mistakes
- Recording revenue immediately when shipping goods to the consignee rather than waiting for the final sale.
- Failing to maintain proper insurance coverage for inventory that is physically located off-site.
- Neglecting to track inventory levels accurately across multiple different retail locations.
Questions
People also ask
Who owns the inventory in a consignment arrangement?
The consignor retains full legal ownership of the goods until a retail customer purchases them.
When should the consignor record revenue in their accounting records?
Revenue is recorded only after the consignee sells the goods to a final customer.
What happens to unsold goods held by the retailer?
Unsold goods remain the property of the consignor and can usually be returned if the agreement ends.