Consignment agreements

Notes

Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods.

The consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee.

The unsold goods will normally be returned by the consignee to the consignor.

Consignment Accounting - Initial Transfer of Goods

When the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of goods. 

It is usually sufficient to record the change in location within the inventory record of the consignor.

The consignor might do:

  • Periodically send a statement to the consignee, stating the inventory that should be on the consignee's premises.

  • Request from the consignee a statement of on-hand inventory at the end of each accounting period when the consignor is conducting a physical inventory count.

  • It may also be useful to occasionally conduct an audit of the inventory reported by the consignee.

From the consignee's perspective, there is no need to record the consigned inventory, since it is owned by the consignor.

It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.

Consignment Accounting - Sale of Goods by Consignee

When the consignee eventually sells the consigned goods, it pays the consignor a pre-arranged sale amount.

  • The consignor records this prearranged amount 
    DR Cash 
    CR Sales

  • It also remove the related amount of inventory from its records:

    DR Cost of goods sold
    CR Inventory

  • A profit or loss on the sale transaction will arise from these two entries.

  • Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. 

    If so, this is:

    DR Commission expense
    CR Accounts payable

From the consignee's perspective

A sale transaction triggers a payment to the consignor for the consigned goods that were sold.

  • There will also be a sale transaction to record the sale of goods to the third party

    DR Cash or accounts receivable
    CR Sales

Notes