Consigned Goods Management: Accounting, Revenue, and Risks

Your cash flow can become dependent on the speed at which the retailer can sell the goods. And since you have no control over their day-to-day operations, there are no levers to pull to increase sales when you need to. Accounting for consignment stock includes complications that must be managed effectively to ensure accurate books. For illustration, let’s assume that Bakery Inc., the consignor, entered into a consignment arrangement with Walmart, the consignee, to sell its pastry products.

Challenges Relating to Inventory Management

The more they market and promote the consignment products, the more they establish a relationship with their suppliers since they share the same objective. This is important as it means they are more likely to be loyal to their supplier. Since a retailer is willing to take on most of a product’s stock, they are taking on quite a lot of financial risk.

• A consigned item is a product or piece of inventory provided by one party (the consignor) to another (the consignee) for sale, display, or distribution.
• The consignor retains ownership of the goods until they are sold, which means the consignee does not record the inventory on their balance sheet.
• Knowing your product’s durability, quality, and marketability is also essential in a consignment model before making any sales.
• If you have products you need to sell, we recommend consignment as one avenue for customers to find and purchase from you.
• As you might imagine, this two-way relationship can lead to complications in consignment inventory accounting.

Recording Journal Entries for a Consignment Account

This allows for a clear distinction between goods owned and those held on behalf of another party. This agreement specifies that one party will hold another party’s inventory for a specific purpose. However, in case the purpose is not met or fulfilled, the owner receives their stock back.

Consignment Accounting: Definition & Format

Suppose an consignor (owner) agrees to consign goods to a consignee (agent) to sell by consignment. The consignor will purchase the goods and pay for them to the transported to the consignee. The consignee in return for a commission of 10%, will arrange for the goods to be distributed and sold.

Stronger Relationships with Suppliers

The consignee does not take ownership of the goods at any point; instead, they earn a commission on the sales made. This type of consignment is common in industries such as art galleries, where the gallery sells artwork on behalf of the artist. The consignor retains ownership and records the inventory on their balance sheet until the sale occurs.

Inventory Tracking

In consignment inventory accounting both the owner and the retailer must maintain their own records. However, the consignment inventory accounting will be different for each party. The consignor is taking on quite a bit of risk by being able to take on the majority of the product’s stock from the warehouse. This is due to the possibility that shops will only effectively sell the goods. When this occurs, the consignor/supplier could lose much more money than usual and might even need to increase their inventory. It may also be challenging for the retailer to sell some consignment products because they lose their effectiveness after a set time.

Consignment inventory is different from a wholesale distributor because the consignor — the owner of the product — only gets paid if the product sells. In wholesale transactions, the owner of the product (or how nonqualified deferred compensation nqdc plans work inventory) is paid upfront by the retailer that wants to sell its goods. They buy a specific set of units from the wholesaler for a set price per unit, knowing they will add a markup when selling it retail.

Firstly, ABC Co. must record the sale proceeds for goods sold by XYZ Co. As mentioned, the consignor must use two double entries to record the transaction. The first journal entry used to record the sale proceeds is as follows. The consignee now pays the balance of $5,800 to the personal account of the consignor, clearing the account with the journal entry, with no entry made by the consignor. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.