Definition:
Consignment inventory represents stock legally owned by one company or business but held by another. Usually, the risks and rewards associated with consignment inventory remain with the company that owns it.
Consignment inventory is common in industries where companies transfer their goods to the dealer, which distribute or sell them further. The dealer, in this case, is only responsible for its distribution or retail operations.
As mentioned, there are usually two parties involved in the consignment deal. The first party, the consignor, is the company that provides the goods. The other party, the consignee, is the company or business that holds the physical inventory.
The consignee also has the option to return any unsold or damaged goods to the consigner. Other names used for consignment inventory are consignment goods or consignment sales.
Accounting Treatment:
When it comes to the accounting treatment of consignment inventory, the standards are clear about it. Since the risks and rewards of the goods do not transfer due to the transfer, the consignor cannot record the inventory as sold.
However, some companies may still choose to convert inventory from one account to another to keep their records organized.
With consignment inventory, the consignor transfers the goods to the consignee, which sells the goods to customers. Once the consignee sells the goods, the risk and rewards related to the inventory get transferred.
The consignee also keeps a percentage of the sale proceeds and pays the consignor a predetermined sales amount.
Once the consignee sells the inventory, the consignor can record the sale amount. As with any other sale transaction, it consists of two double entries to the accounts.
The first double entry is to record the sale made through the consignee, while the second double entry is to record the decrease in inventory. Therefore, the consignor can only reduce its inventory account once it receives the sale proceeds.
On the other hand, if the consignee fails to sell all the goods transferred, they will return those goods to the consignor. In that case, the consignor doesn’t need to pass any double entry since the risks and rewards stay the same.
If the consignor had transferred the inventory into a different account, then they can convert the goods back to their finished goods account.
Journal Entry:
As mentioned, when the consignor transfers goods to the consignee, the risks and rewards still remain. Therefore, the consignor doesn’t need to pass a journal entry to the accounts.
However, some consignors may use the following double entry to transfer inventory into a different account, for the organization.
| Entry | Description | Amount |
| Dr | Consignment inventory | x |
| Cr | Finished goods | x |
Once the consignee sells the goods, it will repay the consignor the sale proceeds. It is when the risks and rewards transfer and the consignor can record the sale.
As mentioned, the consignor must use two double entries to record the transaction. The first journal entry used to record the sale proceeds is as follows.
| Entry | Description | Amount |
|---|---|---|
| Dr | Cash or Bank | x |
| Cr | Sales | x |
The next journal entry is to reduce the inventory. The treatment will differ according to whether the consignor has transferred the goods to a temporary consignment inventory account. The journal inventory is as follows.
| Entry | Description | Amount |
|---|---|---|
| Dr | Cost of sales | x |
| Cr | Consignment inventory / Finished goods | x |
In case the consignee returns unsold goods, the consignor doesn’t need any accounting entries. However, if the consignor had transferred the goods to a temporary consignment inventory account, it must reverse the accounting treatment.
Example:
A company, ABC Co., transfers its goods to another company, XYZ Co., which further sells its goods to customers. At the start of the year, ABC Co. sends goods valued at $100,000 to XYZ Co.
Subsequently, at the end of the year, XYZ Co. returns $20,000 worth of goods to ABC Co.
For the $80,000 goods sold, XYZ Co. gives ABC Co. $120,000 sale proceeds collected from its customers through a bank transfer.
Firstly, ABC Co. must record the sale proceeds for goods sold by XYZ Co. The accounting treatment will be as follows.
| Entry | Description | Amount |
| Dr | Bank | $120,000 |
| Cr | Sales | $120,000 |
Similarly, ABC Co. must record the transfer of its inventory to customers, which marks a transfer of risks and rewards. The accounting treatment is as follows.
| Entry | Description | Amount |
|---|---|---|
| Dr | Cost of sales | $80,000 |
| Cr | Finished goods | $80,000 |
For the goods that XYZ Co. returned, ABC Co. does not need to pass any accounting entries.
Conclusion:
Consignment inventory refers to goods transferred from a company to another party while still holding its risks and rewards.
Therefore, there are two parties in a consignment inventory deal, the consignor and the consignee. The accounting treatment for consignment inventory depends on whether the consignee sells the goods or not.