Are Goods "Sold" on Consignment Actually Sales?
Michael C. Dennis, MBA, CBF

Questions from our Readers

Question: Are goods "sold" on consignment actually sales? Is there anything I should be concerned about as relates to my responsibilities to collect the outstanding balance?

Answer. Merchandise transferred on consignment is not sold to the consignee. This consignee does not own or pay for consigned inventory until and unless it is sold. Since the supplier [the consignor] still owns the inventory, the transfer of goods to the consignee under a consignment agreement should not be recorded as a sale under Generally Accepted Accounting Principles.

What happens in a typical consignment arrangement is that if and when the consignee sells your company's inventory it must report the sale and send payment within a specified number of days. The problem is that unless the consignor can periodically visit the consignee and count the inventory on hand, the consignor must trust that sales are being reported as they occur.

Account reconciliation is challenging under a consignment arrangement. Why? Because the consignee does not own the merchandise in question and [depending on the terms of the consignment agreement] may not necessarily be responsible for loss, damage, theft or shrinkage of or to your merchandise. When there is a discrepancy such as a shortage, the consignor often must absorb the loss.