Consignment

What is a Consignment?

Consignment refers to a common arrangement in commerce where goods are sent from one party, called the consignor, to another, referred to as the consignee. The consignee, usually an agent, sells the goods on behalf of the consignor. This method is often used when the goods are sent to a foreign market or when the consignor wants to retain ownership of the goods until they are finally sold.

Key Elements of Consignment:

Consignor: The owner of the goods who sends them to the consignee.
Consignee: The agent or business entrusted with selling the consignor’s goods.
Commission: The fee earned by the consignee upon the sale of the goods.
Consignment Account: A detailed account showing the cost of goods, expenses, commission, and sales proceeds.

Examples of Consignment

Clothing Retail: A fashion designer sends a collection of garments to a retail store. The store acts as a consignee, showcasing and selling the garments. The designer (consignor) earns money upon the sale of each piece, while the store retains a commission.
Art Gallery: An artist consigns artwork to a gallery. The gallery, as the consignee, curates and sells the artwork on behalf of the artist, taking a commission for each sale.
Electronics: A tech company sends refurbished gadgets to a vendor specializing in resale. The vendor sells the gadgets under consignment, earning a commission and sending the remaining proceeds back to the tech company.

Frequently Asked Questions

What is the main advantage of consignment for the consignor?

Answer: The main advantage is that the consignor retains ownership of the goods until they are sold, reducing the risk associated with outright sales to the consignee. It also allows accessing new markets without upfront costs and leveraging the consignee’s sales channels.

Does the consignee own the consigned goods?

Answer: No, the consignee does not own the goods. They merely have custody of the goods and are responsible for selling them on behalf of the consignor.

When does the consignor get paid for the consigned goods?

Answer: The consignor gets paid after the consignee has sold the goods. At this point, the consignee deducts their commission and other agreed expenses before remitting the remaining proceeds to the consignor.

What happens if the consigned goods are not sold?

Answer: If the goods are not sold, they may either be returned to the consignor, or an extended arrangement may be made based on the terms of the consignment agreement.

How is a consignment account settled?

Answer: A consignment account details the transactions involving the consigned goods. It includes the cost of the goods, expenses incurred by the consignee, the consignee’s commission, and the proceeds from sales. The final settlement involves paying the consignor the remaining balance after deducting all applicable expenses and commissions.

Refurbished Goods: Products that have been returned, repaired, and resold.
Sales Commission: A fee paid to the consignee or sales agent based on the sales made.
Revenue Sharing: The distribution of profits and expenses between business entities involved in certain transactions.

Online Resources for Further Learning

Suggested Books for Further Studies

“Financial and Managerial Accounting” by Carl S. Warren, James M. Reeve, Jonathan Duchac: This book provides an in-depth understanding of accounting principles including consignment accounting.
“Accounting Made Simple” by Mike Piper: A great resource for anyone new to accounting, including the fundamentals of consignment transactions.
“Consignment Retail” by R. Larry Reynolds: This book specifically focuses on consignment as a retail method and provides practical insights into its implementation.

Accounting Basics: “Consignment” Fundamentals Quiz

### Who retains ownership of the goods in a consignment arrangement? - [x] The consignor retains ownership. - [ ] The consignee retains ownership. - [ ] Ownership is shared equally. - [ ] The ownership automatically transfers after shipment. > **Explanation:** In a consignment arrangement, the consignor retains ownership of the goods until they are sold. The consignee holds the goods and sells them on behalf of the consignor. ### When does the consignee pay the consignor for the goods? - [ ] Upon receipt of the goods. - [x] After the goods are sold. - [ ] At regular monthly intervals. - [ ] Before selling the goods. > **Explanation:** The consignee pays the consignor for the goods after they are sold, taking out their commission and other agreed-upon expenses. ### What is the role of the consignee? - [x] To sell the goods on behalf of the consignor. - [ ] To manage the production of goods. - [ ] To purchase the goods at wholesale prices. - [ ] To store the goods indefinitely. > **Explanation:** The consignee's role is to sell the goods on behalf of the consignor, earning a commission in the process. ### What details are included in a consignment account? - [x] Cost of goods, expenses incurred, commission, and sales proceeds. - [ ] Only the cost of goods and sales proceeds. - [ ] Only expenses incurred and commission. - [ ] Only the commission earned by the consignee. > **Explanation:** A consignment account includes the cost of the goods, expenses incurred by the consignee, the consignee’s commission, and the sales proceeds. ### Can the consignee return unsold goods to the consignor? - [x] Yes, they can return unsold goods. - [ ] No, the consignee must retain all unsold goods. - [ ] Only if they are defective. - [ ] Only if the consignment agreement allows it. > **Explanation:** The consignee can return unsold goods to the consignor, typically per the terms of the consignment agreement. ### Why might a consignor choose to use consignment? - [x] To retain ownership until sale and reduce upfront costs. - [ ] To reduce the cost of production. - [ ] To avoid dealing with customers. - [ ] To ensure immediate payment for goods. > **Explanation:** A consignor may use consignment to retain ownership of goods until they are sold, indirectly reducing upfront costs by utilizing the consignee's sales channels. ### What happens to the unsold goods in a consignment arrangement? - [x] They can often be returned to the consignor. - [ ] They are typically destroyed. - [ ] They must be stored by the consignee indefinitely. - [ ] They are sold at a discount. > **Explanation:** Unsold goods in a consignment arrangement can often be returned to the consignor per the terms of the agreement. ### Which party usually handles the marketing and selling of consigned goods? - [ ] The consignor. - [x] The consignee. - [ ] A third-party marketer. - [ ] Shared equally by both parties. > **Explanation:** The consignee usually handles the marketing and selling of consigned goods as part of their role. ### What is the major financial benefit to the consignee in a consignment setup? - [ ] They own the goods and can resell them. - [x] They earn a commission on sold goods. - [ ] They get a discount on the goods. - [ ] They do not have any responsibilities. > **Explanation:** The major financial benefit to the consignee is the commission earned on sold goods, providing them an incentive to sell. ### When establishing a consignment partnership, what document is most important? - [x] The consignment agreement. - [ ] The shipment receipt. - [ ] The sales invoice. - [ ] The inventory list. > **Explanation:** The consignment agreement is crucial as it outlines the terms, responsibilities, and financial arrangements between the consignor and the consignee.

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