Consignment inventory is stock that is stored with the purchasing company (the consignee) rather than the selling company (the consignor). Payment is made by the consignee only when the goods are sold. Any unsold items are returned to the consignor.
As you might imagine, this two-way relationship can lead to complications in consignment inventory accounting.
We’ve put this guide together to shed some light on how to account for consignment inventory, including the most important journal entries you need to know.
Accounting for consignment stock includes complications that must be managed effectively to ensure accurate books.
What is consignment inventory?
Consignment inventory is merchandise that’s stored by a retailing business but owned by its supplier until the items have sold. Any unsold products can be returned to the consignor.
Inventory items that are sold through the consignment model are often perishable, seasonal, or previously owned.
The consignment inventory model is well suited to high-end goods.
It’s especially beneficial for retailers that are unsure of demand for the product. Taking inventory on consignment allows you to offer your customers a larger variety of goods with significantly lower financial risk since you aren’t paying for the inventory until it is sold.
However, the consignment inventory model poses some risks for suppliers.
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.
On the flip side, the major benefits for suppliers are that your products get in front of more people, and customer loyalty is likely to improve with those customers you offer consignment options for.
The consignment partnership
Inventory management is a critical element of consignment partnerships.
In consignment contracts, the retailer is the consignee, and the supplier is the consignor. The transfer of ownership from supplier-owned inventory to retailer-owned inventory is called consumption.
Before you consider entering a consignment inventory arrangement, you should discuss and agree on the conditions.
Consignment inventory contracts should cover:
- Responsibility for freight and shipping costs
- Storage conditions for items not on display
- Liability for insurance, damage, loss, and return policy
- Timeframes for which the consignee is prepared to keep stock
- Consignee commission or percentage of the sale price.
The consignment parties should agree on mutually beneficial measures at the start.
For example, you should stipulate what commission, if any, the consignee will charge the consignor and the intervals a consignee will make payments for sold inventory.
Equally, the length of time the consignee agrees to keep unconsumed goods before returning them to the consignor should also be agreed upon.
Consignment inventory accounting involves numerous journal entries, as featured below.
Consignment inventory accounting
Consignment inventory accounting is problematic for both the consignor and the consignee.
It’s common for companies that use consignment inventory to bypass standard inventory processes, which can lead to increased stock and accounting errors.
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.
Consignment inventory accounting journal entries
Consignment inventory accounting journal entries differ from standard sale and purchase entries. The consignor gives the consignee permission to collect payment on their behalf, but the consignor still owns the inventory and carries the responsibility for the risk of any unsold or obsolete inventory stock.
Below is a list of common consignment inventory accounting journal entries to help you keep correct records when selling or purchasing goods on consignment.
Inventory transfer to consignee journal entry
The consignor purchases their inventory and pays for the consignment inventory to be delivered to the consignee. The consignee sells the consignment inventory in return for a 10% commission.
The consignor journal entries for the purchase and transfer of the consignment inventory are:
Purchase of goods 3,000
Shipping 350
The consignor journal entries for the collection, storage, and sale of the consignment inventory are:
Import duty 200
Cost of goods sold 300
Revenue 7,000
Goods transferred by the consignor journal entry
The consignor journal entries for the transfer of the inventory to the consignee are:
Account Debit Credit
Consignment inventory 3,000
Inventory 3,000
Total 3,000 3,000
This journal entry indicates the transfer of inventory from the standard inventory account to a separate consignment inventory account. The consigned inventory remains the property of the consignor, therefore no entry is made by the consignee.
Consignor account (consignor pays expenses) journal entry
Account Debit Credit
Consignment inventory account 350
Accounts payable 350
Total 350 350
The consignment expenses incurred are the cost of bringing the inventory to its present location and are debited to the consignment inventory account. Depending on the terms agreed with the consignor the journal entry is either to accounts payable or cash credit and no entry is made by the consignee.
Consignee account (consignor pays expenses) journal entry
The consignee pays the import duty of $200 and selling expenses of $300.
Account Debit Credit
Consignor Personal Account 500
Accounts payable 500
Total 500 500
The debit entry is made to the personal account of the consignor and represents the owed by the consignor to the consignee.
The journal entry is either to accounts payable or cash credit, depending on the terms agreed with the supplier, and no entry is made by the consignor.
Consignee sells the inventory journal entry
The consignee sells the consigned inventory on behalf of the consignor.
Consignee account (consignee sells the goods on behalf of consignor) journal entry:
Account Debit Credit
Consignor personal account 7,000
Cash 7,000
Total 7,000 7,000
For simplicity, we assume the consignee has sold the goods for cash because the consignment inventory was sold on behalf of the consignor the journal entry is a credit to the personal account of the consignor.
This represents the amount owed by the consignee to the consignor. No entry is made by the consignor.
Let your accountant know in advance of any consignment inventory contracts so they can help you prepare the accounting side of things.
Consignee records commission
Under the consignment agreement between the consignor and the consignee, the consignee is entitled to a 10% commission and records the consignment accounting journal entry for this commission.
Consignee account (consignee records commission) journal entry:
Account Debit Credit
Consignor personal account 700
Commission income 700
Total 700 700
The journal entry to the commission income account is a credit that indicates the income earned by the consignee on the consignment sales. The amount is owed by the consignor and posted as a debit to the personal account of the consignor.
No entry is made by the consignor.
Consignee accounts to the consignor journal entry
As the inventory has now been sold, the consignee provides an account summary to the consignor. This report is referred to as an Account Sales Report and it lists all transactions the consignee has made concerning the consignment.
Consignment accounting sales report:
Revenue 7,000
Import Duty 200
Selling expenses 300
Commission 700
Net income 5,800
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.
Consignee account (consignee pays the consignor) journal entry:
Account Debit Credit
Consignor personal account 5,800
Cash 5,800
Total 5,800 5,800
Consignor records the consignment sales and expenses journal entry
When the consignor receives the Account Sales Report from the consignee, the consignor then completes the consignment accounting. The journal entry accounts for the sales and expenses of the consignment inventory.
No entry is made by the consignee.
Consignor account (consignor records details from the account sales report) journal entry:
Account Debit Credit
Revenue 7,000
Consignment inventory (import duty) 200
Selling expenses 300
Commission 700
Cash 5,800
Total 7,000 7,000
It’s important to note that the import duty of 200 is debited to the consignment inventory account. This is because the cost of bringing the inventory to its current location must be considered when calculating the cost of goods sold (COGS).
Sales and commission expenses only relate to the consignment inventory which has been sold. It can be recorded directly into the appropriate expense account.
Consignor records the consignment COGS journal entry
The consignor now transfers the COGS from the consignment inventory account to the COGS account.
Consignor accounts (consignor records cost of goods sold) journal entry:
Account Debit Credit
Cost of goods sold 3,550
Consignment inventory account 3,550
Total 3,550 3,550
All the consignment inventory has been sold, therefore the total on the consignment inventory account of inventory ($3,000); shipping ($350); and import duty ($200) is transferred to the COGS account.
No entry is made by the consignee.
If the entire consignment of inventory had not been sold, then only a proportion of the inventory would be transferred. The balance of inventory would be inventory still held by the consignee.
The NET effect of these transactions and journal entries would be summarised in the income statement reflected as below.
Consignment accounting income statement:
Revenue 7,000
Purchases 3,000
Import duty 200
Freight and carriage 350
Cost of goods sold 3,550
Gross margin 3,450
Selling expenses 300
Commission 700
Operating expenses 1,000
NET income 2,450
The NET income of $2,450 represents the profit made by the consignor on this inventory consignment.
Make sure you and your consignment inventory partner have an equal understanding of the partnership and its accounting requirements from each side.
Optimise your consignment inventory control processes
Are you a supplier looking to place your products in front of a larger prospective customer base, or a retailer seeking to expand your range while limiting your inventory risk?
If so, consignment inventory could be a viable option for your business.
To ensure maximum accuracy and profitability when dealing with consignment stock, you’ll need a robust inventory management system.
Unleashed inventory management software gives retailers, wholesalers, and their suppliers the ability to track stock across multiple warehouses and geographical locations. Plus, you can easily integrate it with all your existing business software for a fully connected system that updates itself in real-time.
Try Unleashed for free today or book a demo to learn how we can help your business make light work of consignment inventory accounting and stock management.
