What is consignment (short definition)
– Consignment is an arrangement where the owner of goods (the consignor) leaves items with an authorized third party (the consignee, such as a consignment shop or gallery) to sell on the owner’s behalf. The consignor keeps legal ownership of the items until they are sold.
How consignment typically works
– The owner delivers the goods to a consignment seller.
– Before possession changes hands, the parties agree on how sales revenue will be split (a commission for the consignee, the remainder to the consignor).
– The consignment agreement normally specifies a time limit: if the item doesn’t sell within that period, it is returned or the period may be extended by mutual consent.
– Consignment can be done in physical stores (thrift shops, specialty consignment boutiques, art galleries) and online marketplaces that act like consignment outlets.
Key definitions (one-line)
– Consignor: the person or producer supplying the goods for sale.
– Consignee: the shop, gallery, or third party that displays and sells the goods.
– Commission: the percentage of the final sale price the consignee keeps as payment.
Common uses and examples of items sold on consignment
– Typical categories: clothing, infant wear, accessories, furniture, musical instruments, art, jewelry, athletic equipment, books, and other secondhand goods.
– Galleries commonly handle artwork; thrift and specialty shops handle clothing and household items.
– Online marketplaces (e.g., auction and listing platforms) can serve a consignment-like role by providing access to buyers for a fee.
Benefits of selling on consignment
– Access to a ready audience and selling infrastructure without needing your own retail space, website, or payments system.
– Useful for sellers who lack time or prefer not to manage direct sales.
– Can increase exposure for items that are hard for the owner to market alone.
Challenges and trade-offs
– Commission rates can be high. For example, galleries often charge about 50%; consignment shops may take roughly 25% to 60% of the sale price.
– The consignor cedes control over product presentation and marketing decisions to the consignee.
– Revenue is only realized if and when the item sells; unsold goods return to the owner after the consignment term.
What “consignment only” means
– “Consignment only” indicates the arrangement is strictly that items are held and offered by the consignee until sold, and ownership remains with the consignor until that point.
How consignment payment agreements usually work
– Most consignment sellers have a standard fee schedule showing the split between shop and owner.
– Larger-ticket items (for example, fine art) are often negotiable because they can generate higher absolute revenue.
– The consignment period and whether unsold goods will be returned should be spelled out in writing.
Simple worked examples
1) Thrift-shop clothing example (based on typical splits)
– Agreed split: consignor 60%, shop 40%.
– Item sells for $100.
– Seller receives: 60% of $100 = $60.
– Consignment shop keeps: 40% of $100 = $40.
2) Gallery art example (gallery commission ~50%)
– Artwork sells for $2,000.
– Artist receives: 50% of $2,000 = $1,000.
– Gallery keeps: 50% of $2,000 = $1,000.
Short checklist for sellers (before consigning an item)
– Confirm the commission percentage and whether it’s negotiable.
– Get the consignment period and return policy in writing.
– Verify who controls pricing, display, and marketing.
– Ask about any additional fees (storage, insurance, photography, listing fees).
– Understand ownership remains with you until sale; clarify liability for loss or damage while on consignment.
– Choose a consignee that specializes in your item type (clothing, art, furniture, etc.).
Is consignment worth it?
– It depends on your priorities. Consignment can widen your buyer pool and save you time, but commissions reduce your net proceeds and you cede marketing control. For many sellers without retail space or who value convenience, consignment is attractive; for others who want full pricing or branding control, direct sales may
may be preferable.
How consignment works — step‑by‑step
– You (the consignor) deliver goods to a consignee (the seller or agent) who displays, markets, and attempts to sell them on your behalf.
– Ownership remains with you until a sale is completed; the consignee acts as an agent and typically takes a commission (a percentage of the sale) plus any agreed fees.
– When an item sells, the consignee collects payment, subtracts commissions/fees, remits the balance to you, and records its commission as revenue.
– If the item doesn’t sell within the agreed consignment period, you either retrieve the item, renegotiate, or allow the consignee to discount or return it, per your contract.
Worked numeric example
Assumptions:
– Retail sale price set at $200.
– Consignment commission = 40% of sale price.
– One‑time photography/listing fee = $15.
– Consignment period: 90 days; item sells within that period.
Calculation:
– Gross sale proceeds = $200.
– Commission = 40% × $200 = $80.
– Other fees = $15.
– Net remittance to consignor = $200 − $80 − $15 = $105.
If the consignor’s cost of the item (cost of goods sold, COGS) was $60, the consignor’s gross profit on the transaction = $105 − $60 = $45 (recognized when the sale occurs).
Simple accounting entries (illustrative; follow applicable GAAP/tax rules)
For the consignor (owner of goods):
– Before sale: inventory remains on consignor’s books; no sale recorded.
– On sale: debit Cash/Receivable $200; credit Revenue $200; debit COGS $60; credit Inventory $60.
– When receiving remittance from consignee: debit Cash $105; credit Receivable from Consignee $105 (or reduce accounts receivable).
For the consignee (agent):
– On sale: debit Cash $200; credit Payable to Consignor $120 (amount due consignor) and Commission Revenue $80 (or credit Commission Revenue $80 and a liability for remittance).
Key legal/accounting/tax points to verify
– Ownership and title: Confirm contract language that states ownership transfers only on sale.
– Revenue recognition: Under modern revenue standards (e.g., ASC 606 in the U.S.), determine whether the consignee is acting as agent or principal — this affects who recognizes revenue and when.
– Sales tax: Determine who collects and remits sales tax in your jurisdiction (often the seller/consignee, but rules vary).
– Insurance and liability: Clarify who bears loss/damage risk while goods are stored or displayed.
– Reporting and forms: In the U.S., consignees may request tax forms (e.g., Form W‑9) for reporting payments; check local tax reporting requirements.
Checklist for consignors (practical, before you sign)
– Get a written consignment agreement covering: consignment period,
period, pricing/reserve, commission rate, inventory list with serial numbers or SKUs, delivery and acceptance terms, and return/unsold goods procedures.
– Pricing and reserve price: Specify who sets the retail price, whether consignor can set a minimum acceptable sale price (reserve), and what happens if a sale price falls below the reserve.
– Commission and fees: State the consignee’s commission rate (percentage or fixed fee), whether commissions apply to markdowns or discounts, and any additional fees (listing, credit-card fees, storage).
– Payment terms: Define timing and method of payment to consignor after a sale (e.g., weekly, monthly, net 30) and whether payments are made only after funds clear or after buyer pickup.
– Inventory manifest: Provide a signed list (manifest) of items consigned, including descriptions, quantities, SKU/serial numbers, cost basis for consignor records, and suggested retail prices.
– Title and risk of loss: Reiterate that legal title remains with consignor until sale, and state which party bears risk for loss, theft, or damage while items are in the consignee’s possession.
– Insurance: Require the consignee to carry adequate insurance and name the consignor as additional insured or require the consignee to reimburse losses for uninsured items.
– Inspection and condition: Document initial condition of items and any repair/refurbishment responsibilities and who pays for such work.
– Sales tax handling: State whether the consignee will collect and remit sales tax, provide receipts, and supply appropriate sales-tax reporting to consignor.
– Reporting and records access: Require periodic sales reports with item-level detail, and allow consignor to audit inventory on request.
– Duration and termination: Define consignment term, automatic renewals (if any), notice period for early termination, and process for return of unsold goods.
– Disposal of unsold/damaged goods: Specify whether consignee may liquidate at end of term, return at consignor expense, or destroy with reimbursement.
– Exclusivity and territory: Note whether consignment is exclusive to one consignee or limited to certain geographic areas or sales channels.
– Confidentiality and IP: Protect pricing strategies, customer lists, and intellectual property (e.g., trademarks, designs).
– Dispute resolution and governing law: Include arbitration/mediation clauses, choice of law, and venue for disputes.
– Signatures and contact info: Ensure authorized signatures and up-to-date contact information for notices.
Checklist for consignees (practical, before you accept)
– Verify ownership: Get written confirmation that consignor retains title until sale and proof items are not encumbered.
– Condition and authenticity: Request documentation of authenticity and condition, especially for high‑value items (e.g., certificates, serial numbers).
– Commission and payout schedule: Confirm commission %, timing, payment method, and whether you must remit taxes or provide reporting.
– Display and pricing control: Clarify who can mark down, whether reserves apply, and promotion responsibilities.
– Liability and insurance: Obtain proof of insurance and clarify who pays for loss/damage beyond insured amounts.
– Inventory controls: Require a manifest and implement barcode/tagging and reconciliation procedures.
– End-of-term logistics: Agree who pays return shipping or liquidation costs for unsold inventory.
Accounting and tax basics (concise, non‑jurisdictional)
– For consignors (owner of goods): Goods on consignment usually remain inventory on the consignor’s balance sheet until sold to the end customer. Revenue is typically recognized when control passes to the buyer (the final customer), per revenue recognition standards (e.g., ASC 606 or IFRS 15). Record cost of goods sold (COGS) at the time of sale.
– For consignees (agent/retailer): A consignee usually does not record consigned items as inventory or revenue; instead it records commission income when the sale occurs and remits net or gross proceeds to consignor per the agreement. Whether the consignee is an agent (records commission only) or a principal (records gross sales and COGS) depends on who controls the goods before transfer to the customer — apply principal/agent criteria under ASC 606 / IFRS 15.
Worked numeric example (simple, illustrates journal entries)
Assumptions:
– Consignor cost of item: $50
– Retail sale price: $200
– Consignee commission: 30% of gross sale
– Buyer pays $200 cash; consignee remits payments monthly and collects sales tax (ignored here for simplicity)
If consignee acts as agent (common for consignment):
– At sale, consignee records:
Dr. Cash
Dr. Cash $200
Cr. Due to consignor $140
Cr. Commission income $60
(When consignee later remits the net proceeds to the consignor)
Dr. Due to consignor $140
Cr. Cash $140
Consignor’s books (common treatment when consignee is an agent)
1) When goods are shipped to consignee (still owned by consignor)
Dr. Inventory—Consigned $50
Cr. Inventory $50
(If you track consigned stock on a separate subaccount; otherwise leave inventory in place with disclosure.)
2) When consignee reports the sale (and either remits or will remit the net proceeds)
Option A — consignee immediately remits net proceeds (or consignor recognizes cash-receivable from consig
Option A — consignee immediately remits net proceeds (or consignor recognizes cash from consignee)
When the consignee acts as agent and remits the net proceeds immediately, the consignor recognizes revenue only when the third‑party sale occurs. Typical journal entries for the consignor (using the numbers in your context: selling price $200, commission $60, cost $50) are:
1) Record cash received and commission expense (to reflect the agent’s fee):
– Dr Cash 140
– Dr Commission expense 60
– Cr Sales revenue 200
2) Remove consigned inventory and record cost of goods sold:
– Dr Cost of goods sold 50
– Cr Inventory—Consigned 50
Explanation and check: Debits = 140 + 60 = 200; credit = 200 (sales). COGS entry separately matches and reduces inventory by the cost of goods sold.
Option B — consignee reports the sale but remits later (consignor recognizes a receivable)
If the consignee reports the sale but will remit at a later date, the consignor recognizes a receivable instead of cash:
1) Record receivable and commission expense:
– Dr Due from consignee (or Accounts receivable—consignee) 140
– Dr Commission expense 60
– Cr Sales revenue 200
2) Record cost of goods sold and remove consigned inventory:
– Dr Cost of goods sold 50
– Cr Inventory—Consigned 50
When the consignee later pays:
– Dr Cash 140
– Cr Due from consignee 140
Other practical points and assumptions
– Revenue recognition timing: Under typical consignment terms, the consignor should not recognize revenue at the time of shipment to the consignee because legal title and the risks/rewards of ownership remain with the consignor until the consignee sells to a third party. Revenue
Revenue should be recognized only when control of the goods transfers to the third-party buyer—i.e., when the consignee sells the consignor’s goods to an outside customer. Under modern revenue standards (IFRS 15 / ASC 606), that means the consignor recognizes revenue when the performance obligation is satisfied (control transfers), not when goods are shipped to the consignee.
Key accounting consequences (practical checklist)
– Identify legal title and risks/rewards: If title and inventory risk remain with the consignor, do not derecognize inventory on shipment to consignee.
– Determine nature of consignee: Is the consignee an agent (acts on consignor’s behalf) or a principal (takes title/assumes inventory risk)? Agent → consignor retains inventory on its books; principal → consignee records inventory and recognizes revenue when it sells.
– Revenue timing: Consignor records revenue only when consignee sells to an external customer (or when a performance obligation is otherwise satisfied).
– Receivable