Accounting for consignment inventory at a buyerís warehouse

October 24, 2012

Consignment inventory is one of the marketing methods used to attract customers. One variation of consignment is when a seller delivers goods to a customer (buyer) but retains the title to the goods until the buyer uses the goods. In this article we explore accounting for this type of consignment arrangement.

1. Nature of inventory consignment arrangement

A more typical inventory consignment arrangement is when a manufacturer (consignor) ships products to a seller (consignee) that sells the products to an end buyer. In this situation the consignor retains the title to the products until the consignee sells them. At the time of the sale, the consignor can record sales and cost of goods sold. For a more detailed discussion of this inventory consignment type, refer to article Accounting for consigned inventory.

A less typical inventory consignment arrangement is when the manufacturer ships products to a customerís warehouse but agrees to retain the title to the products until the customer uses them. In this case there isnít an intermediate party (i.e., seller).

The sequence of events in this type of consignment arrangement may be as follows:

  1. A manufacturer ships goods to a customerís warehouse. At the time of the shipment, the manufacturer classifies the goods as consigned goods in accounting records.
  2. The customer accepts the shipped goods and stores them in the customerís warehouse, but does not take title to them. Such goods are not recorded on the customerís balance sheet (but may and should be recorded in the customerís inventory records for proper identification and tracking).
  3. The customer uses some or all of received goods in the customerís manufacturing process. When such goods are consumed, the customer notifies the manufacturer about the quantities consumed.
  4. The manufacturer receives the notification about the consumed goods, issues an invoice to the customer and records sales (and cost of goods sold) for the consumed goods.
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