Accounting for consigned goods
Accounting guide about consigned goods; definitions of consignment, consignee, consignor; examples of consignment journal entries; consignment benefits, risks and controls.
1. Definition of consignor, consignee, and consigned inventory
Let us start with several definitions related to accounting for goods on consignment.
Consignor is a business or person who makes a consignment to consignee.
Consignee is a business or person that holds consignor’s goods for sale and acts as consignor’s agent in selling the goods.
Consigned inventory includes goods shipped by a consignor to the consignee, who acts as an agent in selling the goods.
Consigned inventory is the property of the consignor, not the consignee, until it is sold by the consignee. In other words, goods on consignment are included in the inventory of the consignor (i.e., seller) while they are excluded from the consignee’s (i.e., buyer’s) inventory. Consignee does not own the inventory but agrees to exercise due diligence in holding and selling consigned merchandise.
The major differences between a sale and consignment are listed in the table below:
Sale |
Consignment |
|
Ownership |
Transferred to the buyer along with the transfer of goods. |
Property of the consignor (seller) until consigned inventory is sold by the consignee (reseller). |
Goods sold on credit |
Buyer is a debtor of the seller. Debtor-creditor relationship. |
Consignee is a debtor of the consignor. Agent-principal relationship. |
Return of goods |
Buyer cannot return goods unless they are defective or seller agrees to take them back. |
Can be returned to seller (consignor) because consigned inventory is property of the consignor until it is sold by the consignee. |
Goods lost after delivery |
Buyer’s loss. |
Seller’s (consignor’s) loss. |
2. Example of accounting for goods on consignment
Let us look at a simple example to understand the accounting for goods on consignment. Friends Company, a manufacturer of valves, ships a consignment of gas valves to a retail store BestHome. In this case, Friends Company is a consignor while BestHome is a consignee. Friends Company pays freight costs while BestHome pays local advertising costs and credit card processing fees that are reimbursable from Friends Company. By the end of the period, BestHome sells half of the consigned merchandise, notifies Friends Company of the sales, retains a 15% commission, and remits cash due to Friends Company.
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