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Consignment is a business arrangement in which a supplier, called the consignor, transfers physical possession of goods to a third party, called the consignee, without transferring ownership. The consignee sells the goods on behalf of the consignor and remits payment only after the sale occurs. If the goods do not sell, they are returned to the consignor. The consignor retains legal title to the inventory throughout the consignment period.
Think of it like giving a clothing store a rack of your designs to sell: the store holds your clothes, takes a cut when they sell, and sends back whatever does not move.
The defining feature of a consignment arrangement is the separation of physical possession from legal ownership. Even though the consignee holds the goods, they do not appear on the consignee's balance sheet as inventory. They remain on the consignor's balance sheet as consignment inventory until the moment of sale to the final customer.
Payment flows to the consignor after the consignee sells the goods to an end buyer. The consignee deducts an agreed commission, typically 20% to 40% of the sale price, and remits the balance. Unsold goods are returned at the consignee's expense under most standard agreements, unless the contract specifies otherwise.
Consignment arrangements appear across several industries where managing inventory risk, testing new markets, or distributing through intermediaries is a priority.
Both parties must account for consignment inventory correctly to avoid misrepresenting their financial positions.
The consignor records the goods as "consignment inventory" on its balance sheet throughout the consignment period. No revenue is recognized until a sale to a third party actually occurs. When the consignee reports a sale, the consignor records revenue, removes the inventory from its books, and records the related cost of goods sold.
The consignee does not record the consigned goods as its own inventory. It records a liability representing its obligation to the consignor for goods held, and recognizes commission income when sales occur. Misclassifying consigned goods as owned inventory inflates a consignee's apparent asset base and can mislead lenders or investors about the company's financial health.
| Consignment | Standard Purchase | |
|---|---|---|
| Inventory Ownership | Stays with consignor until sale | Transfers to buyer at delivery |
| Consignee/Buyer Payment | After goods are sold to end customer | At or shortly after delivery |
| Unsold Goods Risk | Borne by consignor | Borne by buyer |
| On Consignee/Buyer Balance Sheet | Not recorded as inventory | Recorded as owned inventory immediately |
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