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Consignment
Transferred to the buyer along with the Property of the consignor (seller) until
transfer of goods.
consigned inventory is sold by the
consignee (reseller).
Return of
goods
Buyer cannot return goods unless they Can be returned to seller (consignor)
are defective or seller agrees to take because consigned inventory is property
them back.
of the consignor until it is sold by the
consignee.
Goods lost
after delivery
Buyers loss.
notifies Friends Company of the sales, retains a 15% commission, and remits cash due to Friends
Company.
Consignment Accounting
Consignment Overview
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.
Periodically send a statement to the consignee, stating the inventory that should be on the
consignee's premises. The consignee can use this statement to conduct a periodic reconciliation of the
actual amount on hand to the consignor's records.
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. The consignor incorporates this
information into its inventory records to arrive at a fully valued ending inventory balance.
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 with a debit to cash and a credit to sales. It
also purges the related amount of inventory from its records with a debit to cost of goods sold and a
credit to 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 a debit to commission expense and a credit to 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, which is a debit to cash or accounts receivable and a credit to sales.
$600
$1,000
Account Titles
Cash
Debit
Credit
$1,000
$160
$160
$8,000
$1,160
$1,200
$5,640
$3,800
$3,800
The cost of goods sold in this example includes not only 50% of the original inventory cost (i.e., $3,500 =
$7,000 x 0.50) but also 50% of the shipping expense (i.e., $300 = $600 x 0.50):
Consignee: BestHome does not make any journal entry.
Consignee (Buyer)
Reduced investment in inventory
Operational savings
costs
Commission on sale
Operational savings
Risks
No inventory sales
Inventory lost after delivery
Consignor (Seller)
Consignee (Buyer)
Extra inventory warehousing and
handling costs un-reimbursable by consignor
Identification: consigned inventory should be prominently labeled with an identification tag (e.g.,
colored tag) when such inventory is received. Separate colored receiving reports may be used. In the
computer system, consigned inventory should be recorded with a unique part number.
Segregation: consigned inventory should be physically segregated from other inventory. For
example, a part of a warehouse can be set aside for consigned inventory. Consigned merchandise
should be stored in a safe place protected from various hazards such as fire, theft, etc.
Monitoring: consigned inventory should be monitored by the materials review board in order to
determine whether the consigned inventory is obsolete.
In addition to the above-listed accounting controls, consignee could use the following consigned inventory
practices:
Hire independent audit firm for periodic audits of inventory and consigned inventory controls and
report the findings to the consignor.
Establish a maximum amount of time consigned inventory can be retained before it becomes
obsolete (should keep in mind shelf-life issues).
Finally, periodically the consignee must send an Account Sales Report to the consignor. The Accounts
Sales Report shows the merchandise received, merchandise sold, expenses chargeable (i.e.,
reimbursable) to the consignment, and the cash remitted. Then, revenue can be recognized by the
consignor.