Consignment accounting is the 'counting' and recording of details related to property owners (consignors) delivering and entrusting (consigning) materials or goods to agents (consignees) selling, returning or otherwise disposing of the transferred inventory.

'Consignments' refers to material goods transferred to (or to be transferred to) custodians for sale (for a defined period of time). In the U.S. and elsewhere 'consignment' can also describe the type of transaction: 'placing goods on consignment'.

Consignors retain ownership of consignments while goods are in the custody of selling agents. Ownership is transferred to buyers upon completion of payments, or consignors may relinquish ownership when unsold goods are donated, lost, stolen or destroyed.

Consignees do not take possession of consignments but should maintain inventory records of consignments for reconciliation and insurance purposes.

If charged with responsibility for property in their possession consignees should maintain adequate property-casualty insurance. Written consignment agreements should name the responsible party(ies) for risk of loss.

Consignors typically pay delivery costs (carriage and freight). In the consignment-shop world consignors often deliver their goods to resellers' locations at their own expense. Some stores might provide a delivery service. Online consignment operations (and other forms of businesses) might have consignors 'drop ship' sold merchandise.

Responsibility for expenses (like repairs, cleaning, storage) related to consignments in custody should be spelled out in the consignment agreement. Shops often charge a separate fee for such additional services.

Consignees' commissions are usually agreed upon prior to delivery. They may be variable or fixed dollar or percentage amounts.

Upon sales of consigned goods, consignees realize assets (sales proceeds) and take on liabilities (amounts owed to consignors), recording a debit to cash and a credit to sales.

In a sense consignees 'float funds in escrow', particularly when consignors accept payment as store credit, or sales proceeds are retained until a minimum payout amount is reached. (Check with taxing authorities to see if on a cash basis, unpaid liabilities are taxable to consignors in the tax year.)

Some stores (of lesser repute) avoid making sufficient effort to get payment to consignors then enforce provisions for dismissing unpaid balances after some period of time. Those 'forgiven debts' are likely taxable.

The elaborate details illustrated at double-entry-bookkeeping.com may be more complexity of consignment accounting than most store owners are required to know. Consignment software programs do much of the number crunching in the background and produce the reports needed to correctly 'account' for the transactions of the business.

Consignment Example

A clothing manufacturer wants to distribute its dresses widely so to encourage stores to stock, display and sell the dresses, the manufacturer delivers 'free inventory' to retail stores 'on consignment', keeping ownership of the stock and agreeing to a commission to be paid for each dress sold. Periodically stores 'settle' with the manufacturer by sending the sales proceeds to the manufacturer after deducting the commission, and/or returning unsold merchandise after a designated period of time.

Definitions:

A consignor is an entity (person, organization, business) that places (consigns) merchandise (consignments, consigned inventory) with another entity (consignee) who takes possession of and responsibility for the merchandise and assumes the task of selling the merchandise for a commission. Consigning is the act of placing (entrusting) property with a consignee.

Consignment is an article placed with a custodian for sale, or the act of doing so.

About the Author

Steve Henning is the founder and managing director of BCSS which has provided consulting services, support, software and hardware to consignment and resale-related shops since 2001. Mr. Henning has worked as a financial consultant since 1974 in key industries. He holds degrees from the U of Illinois and the American College.

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