Retailers are intermediaries in a supply chain responsible for delivering a product to a customer. In a given supply chain, retailers are usually the last parties that keep inventory and dispose of it to a customer. Sometimes, they must obtain and hold a significant amount of stock to meet demands. However, they also face risks due to it.
Therefore, some suppliers may offer retailers an option to purchase if a customer buys those goods. In this case, the customer becomes a consignee while the supplier is the consigner. The inventory held by the retailer becomes consignment inventory.
What is Consignment Inventory?
Consignment inventory refers to stock held by a retailer on a supplier’s behalf. The retailer only pays the supplier for those goods if a customer buys them. Therefore, the risks and rewards associated with the underlying inventory lie with the supplier. The retailer only holds the stock to sell to a customer. If the goods get damaged or remain unsold, the retailer returns them to the supplier.
With consignment inventory, the retailer still holds the stock. In the relationship between the two parties, the consignee is a retail store specializing in a specific product. The retailer agrees to sell products in exchange for a fee or percentage of the sale proceeds. The consignment inventory business model differs from dropshipping, where the seller does not hold inventory.
What is the accounting for Consignment Inventory?
The accounting for consignment inventory differs between the two parties, the retailer and the supplier. For the retailer, this inventory does not involve any risks or rewards until the final sale. Therefore, the retailer does not account for this inventory in its accounts. However, the retailer may still record the goods received from the supplier for record-keeping purposes. This record stays off the balance sheet, though.
On the other hand, the supplier usually accounts for consignment inventory in the records. This process involves creating a different account to move consignment inventory away from the non-consigned goods. The net effect of this accounting treatment for consignment inventory is zero. The process only involves moving goods from one inventory account to another.
What is the journal entry for Consignment Inventory?
The journal entry for consignment inventory is straightforward. The supplier transfers goods from one account to another. On the financial statements, they may not have a significant impact. It is primarily due to the nature of the inventory not changing and the risks and rewards of staying with the supplier. When a supplier transfers consignment inventory to a retailer, they may use the following journal entry to record it.
| Dr | Consignment inventory |
| Cr | Finished goods |
Once the retailer sells the goods, the supplier can record the sale transaction using the following journal entry.
| Dr | Cost of goods sold |
| Cr | Consignment inventory |
The supplier cannot record the sale unless the retailer sells the goods. The transfer to the retailer does not count as a sale.
Conclusion
Consignment inventory refers to goods that a supplier transfers but not sells to a retailer. In other words, it is stock that a retailer holds on a supplier’s behalf. The risks and rewards associated with the inventory remain with the supplier. Once the retailer sells the goods, the supplier can record a sale transaction. The retailer charges a fee or percentage for the services.
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