Accounting for consigned goods

2.1. Accounting for shipment of consigned merchandise

Friends Company ships gas valves costing $7,000 on consignment to BestHome.

Consignor: to record the shipment of consigned inventory, Friends Company makes the following journal entry:

Consignor: shipment of consigned inventory

Account Titles

Debit

Credit

Inventory (Consignments)

$7,000

 

      Finished Goods Inventory

 

$7,000

Consignee: BestHome does not make any journal entry. Mere receipt of the consigned goods does not make the consignee a debtor of the consignor.  In addition, the consignee does not record the merchandise as an asset in its books as such merchandise is the property of the consignor until it is sold.

2.2. Accounting for payment of freight costs by consignor

Consignor: Friends Company shipped the gas valves to BestHome through a third-party shipping company, which charged Friends Company $600 for shipping goods from the factory to the consignee (i.e., BestHome). To record the shipping expense, Friends Company makes the following journal entry:

Consignor: payment of freight costs by consignor

Account Titles

Debit

Credit

Inventory (Consignments)

$600

 

      Accounts Payable (or Cash)

 

$600

Consignee: BestHome does not make any journal entry.

2.3. Accounting of payment of advertising by consignee

Consignor: Friends Company does not make any journal entry until it is notified by the consignee (e.g., receives an Account Sales Report).

Consignee: usually a consignee is entitled to be reimbursed for expenses incurred in connection with the consignment (i.e., it depends on the consignment agreement). Such expenses may include credit card processing fees, storage and insurance costs, unloading charges, local advertising costs, etc. In our example, BestHome paid $1,000 cash for local advertising costs. The consignee would make the following journal entry:

Consignee: expenses incurred in connection with consignment

Account Titles

Debit

Credit

Receivable from Friends Company

$1,000

 

      Cash

 

$1,000

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