What are Consigned Goods?

Consigned goods are products not owned by the party in physical possession of them. The party holding the goods (the consignee) has typically been authorized by the owner of the goods (the consignor) to sell the goods. Once sold, the consignee retains a commission and forwards all remaining sale proceeds to the consignor. This arrangement is commonly used by manufacturers that do not have direct access to distribution channels, and which prefer to retain ownership of their goods in order to avoid bad debt losses. Retailers may also prefer this approach when they do not have sufficient working capital to buy goods from manufacturers.

A consignment arrangement can be considered an agency relationship, where the consignor is the principal and the consignee is the agent.

Who Recognizes Consigned Goods as Inventory?

The consignor is the legal owner of consigned goods, and so should record these goods in its accounting system as inventory. The consignee is simply selling the goods on behalf of the consignor, and so should not record these goods as inventory. For this reason, the auditors of the consignor should investigate whether its consigned goods have been correctly recorded as assets in its accounting system.

Example of Consigned Goods

Eclectic Designs sells suits of armor that can decorate the front hallways of its customers. Eclectic prefers to manufacture the suits and not worry too much about sales, so it forwards its wares to Medieval Consignment, which sells the armor on its behalf. Under this arrangement, Eclectic is the consignor and retains ownership of the armor until it is eventually sold, while Medieval is responsible for displaying the armor in its store. Eclectic bears the risk of loss if anything happens to the armor while it is on display at Medieval. In exchange for its sales services, Medieval earns a 25% commission on each sale, and remits the remaining 75% back to Eclectic. In this example, the suits of armor are classified as consigned goods, where Eclectic continues to own the armor until it is sold, while Medieval can sell the goods and earn a profit without having to invest in any inventory.