Consigned inventory is stock a supplier owns but stores with a retailer, who pays for it only after selling it to a customer. The arrangement lowers upfront costs and financial risk, and it lets stores carry more variety without buying it outright.
The catch is accounting. Tracking goods you don’t own raises hard questions about payments, commissions, and revenue. Keeping records accurate come tax time is harder still, and without a clear method the numbers get messy fast.
This guide walks through the journal entries, a worked example, and the best practices that keep both sides of the deal in sync.
Key Takeaways
- Consigned inventory belongs to the supplier (consignor) until the retailer (consignee) sells it, so the retailer never books it as an asset.
- Under the Uniform Commercial Code, a true consignment involves goods worth $1,000 or more per delivery and treats the consignor as a secured party.
- The consignor recognizes revenue only when the end customer buys, following revenue recognition rules under ASC 606.
- Inventory management software separates consigned goods from owned stock and keeps journal entries accurate on both sides of the deal.
What is consigned inventory?
Consigned inventory works differently from a standard purchase. Instead of buying products outright, retailers (consignees) stock goods supplied by consignors and pay only after the goods sell. The supplier keeps ownership until the sale, while the retailer earns a commission on each transaction.
The model also has a legal definition worth knowing. The Cornell Legal Information Institute maintains a widely used version of the statute. Its Uniform Commercial Code § 9-102 recognizes a true consignment only when goods are worth $1,000 or more at delivery.
That same section classifies the consignor as a secured party. That status is what lets a consignor file a financing statement to protect its claim to the goods.
It is a win-win in practice. Consignors expand their reach without opening new outlets, and consignees cut upfront cost and the risk of unsold stock. The setup is popular in fast-moving industries like fashion, electronics, and food, where inventory turnover is critical and unsold goods create real losses.
A consignment agreement spells out the commission percentage, how long goods can sit, and who handles shipping or unsold items. The hard part is tracking inventory you don’t technically own, which is where inventory management software keeps quantities, sales, and ownership straight.
What are the pros and cons of consigned inventory?
Consigned inventory carries positives and negatives for both sides. Each party gains something and gives up something under the model.
Pros
- Lower risk for retailers: Retailers pay only for what sells, which means less upfront investment and lower financial risk.
- No leftover stock: Unsold goods can be returned, saving retailers from getting stuck with inventory that won’t move.
- Expanded reach for suppliers: Suppliers reach more stores without the carrying cost of holding inventory, and vendor-managed inventory (VMI) helps them avoid overstocking.
- More variety for customers: Consignment stores can offer a wider range of products without committing to large quantities upfront.
Cons
- Inventory headaches: Tracking goods that aren’t technically yours is hard. Add damaged inventory into the mix, and blame for the loss gets murky.
- Misunderstandings over terms: Clear communication is key, since confusion over commission rates, return policies, and time limits all create tension.
- Pressure to sell quickly: Retailers and wholesalers are often motivated to move products fast, which can cause strain and urgency.
How do you account for consigned inventory?
In a consignment arrangement, the supplier and retailer account for the goods differently. This takes a set of ledger accounts and specific journal entries. The steps below keep records accurate on both ends.
One rule shapes everything. The Financial Accounting Standards Board (FASB) sets revenue recognition under Accounting Standards Codification (ASC) 606. Under that standard, the consignor records no revenue when goods ship to the consignee, only when the end customer buys and control transfers.
Note that this is a simplified guideline. It does not account for cost of goods sold (COGS), shipping expenses, or import duties. Contact a certified public accountant with detailed questions about consigned inventory accounting.
1. Recording goods sent on consignment
Once the goods ship to the retailer, the supplier still owns them, so they don’t go into the retailer’s inventory. Instead, the supplier records them under consignment inventory, kept separate from regular stock.
The supplier enters into their journal:
- Debit: Consignment inventory (to track the value of goods sent out)
- Credit: Inventory (to reduce their regular stock)
2. Receiving consignment goods
Since the retailer doesn’t own the goods, they won’t add them to inventory. Instead, they usually keep a record, such as a spreadsheet or tracking system, to monitor the stock they hold.
There’s no journal entry here, because no money or ownership changes hands at this stage.
3. Recording sales
When the retailer sells the consigned goods, they collect payment from customers and recognize an obligation to pay the supplier. The supplier records the consignment sale once notified.
On the retailer’s books, record the sale as:
- Debit: Cash or bank (because they’ve got the money now)
- Credit: Payable to supplier (to show what they owe for the sold items)
Once notified, the supplier records:
- Debit: Accounts receivable from retailer (to track what’s due)
- Credit: Revenue (to record the income from the sale)
4. Recording commission payments
If the retailer earns a commission on the sale, the supplier records it as an expense, while the retailer logs it as income.
To log the commission owed, the supplier records:
- Debit: Commission expense (the cost of paying the retailer)
- Credit: Commission payable (the amount they’ll pay later)
Once the supplier makes the payment, they track:
- Debit: Commission payable (to clear the debt)
- Credit: Cash or bank (to show the money has gone out)
The retailer, receiving the commission, records:
- Debit: Cash or bank (because they’ve been paid)
- Credit: Commission income (to reflect their earnings)
5. Returning unsold stock
Retailers return the items that don’t sell, and the supplier adjusts their books to move the goods back into regular inventory.
For the returned goods, the supplier records:
- Debit: Inventory (to add the items back)
- Credit: Consignment inventory (to remove them from consignment)
For the retailer, there’s nothing to record, since they never owned the goods.
A practical scenario: accounting for consigned inventory
This worked example clarifies the process. Picture a handmade-ceramics studio (the consignor) that consigns goods to an independent home-goods boutique (the consignee):
- The studio sends $10,000 worth of ceramics to the boutique on consignment.
- The boutique sells $6,000 worth of ceramics to customers.
- The studio charges 80% of the sales value ($4,800), and the boutique earns a 20% commission ($1,200).
- The boutique returns $4,000 worth of unsold ceramics to the studio.
The journal entries would play out as follows.
1. Recording goods sent on consignment
When the studio ships $10,000 worth of ceramics, ownership stays with the studio. It adjusts its inventory to reflect this.
The studio would record the shipment this way:
- Debit: Consignment inventory $10,000
- Credit: Inventory $10,000
At this point, the boutique records nothing, because it hasn’t purchased the ceramics.
2. Recording sales
The boutique sells $6,000 worth of ceramics to customers and collects payment. The sale is recorded on its books as follows.
The boutique records the sale as:
- Debit: Cash $6,000 (money collected from customers)
- Credit: Payable to studio $4,800 (amount owed to the studio)
- Credit: Commission income $1,200 (their 20% commission)
The studio recognizes the sale once the boutique reports the transaction:
- Debit: Accounts receivable $4,800 (amount owed by the boutique)
- Credit: Revenue $4,800 (income from the sale)
3. Recording commission payments
The studio pays the boutique its $1,200 commission for the sales:
- Debit: Commission expense $1,200
- Credit: Cash $1,200
The boutique records the payment, too:
- Debit: Cash $1,200
- Credit: Commission income $1,200
4. Returning unsold inventory
After the sales period ends, the boutique returns $4,000 worth of unsold ceramics to the studio.
The studio records the return this way:
- Debit: Inventory $4,000
- Credit: Consignment inventory $4,000
Since the boutique never owned the unsold ceramics, it records nothing for the return.
What are the best practices for consigned inventory accounting?
Managing consigned inventory can be difficult, but the right approach makes the process smoother. Here are four tips to keep things on track.
1. Invest in inventory management software
Tracking consigned inventory by hand eats time and invites errors. A dedicated inventory system does the heavy lifting: it tracks stock in real time, separates consigned goods from owned inventory, and automates updates. You get cleaner data to export to QuickBooks or Xero through an integration.
The payoff shows up fast. Gillett Diesel Service, an auto repair shop in Bluffdale, Utah, saw the difference after adopting Fishbowl. In their words: “After 4 months into use, we have our inventory correct in real time.”
Across its user base in 2025, Fishbowl customers saw an 8% increase in profit margins and a 17% reduction in sales backorders.
When standard reports fall short, Fishbowl AI Insights generates custom dashboards and reports in plain language, without SQL or custom report requests.
2. Clearly define agreement terms
When setting up a consignment deal, the more detail, the better. Agree on commission rates, payment schedules, and who is responsible for unsold or damaged items. Clear terms from the start make accounting easier and prevent confusion later.
3. Reconcile your records regularly
Small discrepancies can slip through if you’re not careful. Make it a habit to check your records against your actual physical inventory. Regular reconciliation helps you spot problems early and keeps your numbers and profits accurate.
4. Keep communication open
Consignment is a partnership, so communication is vital. Share updates on sales, stock levels, and payments to keep everything transparent, so you catch issues before they become problems.
If you also run a VMI system, the right software integrates with both sides. Suppliers track stock levels while retailers focus on sales.
Streamline consigned inventory accounting with Fishbowl
Managing consigned inventory does not have to be complicated. With Fishbowl, you can track owned and consigned stock in one place and keep your accounting accurate. Its integration with QuickBooks and Xero keeps financial records current as goods move and sell.
Ready to tighten up your consigned inventory accounting? Book a demo and see how Fishbowl keeps inventory and financial data aligned.
Frequently asked questions about consigned inventory
What is the difference between consigned inventory and vendor-managed inventory (VMI)?
Both keep the supplier involved after delivery, but ownership and loss risk differ sharply. With consigned inventory the supplier owns and books the goods until the retailer sells them, so the supplier carries the risk of unsold stock. With vendor-managed inventory (VMI) the retailer usually owns and books the stock, while the supplier monitors levels and reorders on its behalf.
What accounting rules govern consigned inventory under U.S. GAAP?
Under U.S. generally accepted accounting principles (GAAP), consigned goods stay on the consignor’s balance sheet because ownership has not transferred. The governing standard is ASC 606, which ties revenue to the transfer of control, so the consignor books revenue only when the end customer buys. Until then the goods sit in a separate consignment inventory account, apart from regular stock.
How does a consignee record goods it does not own?
A consignee does not record consigned goods as inventory or an asset, because it never takes ownership. Instead it tracks the items in a memo record or its inventory software, for example a running count of units held. Its only journal entries cover the sale itself: collecting cash from the customer, recording the payable to the consignor, and logging any commission earned.
What are the most common consigned inventory accounting mistakes?
The most common errors are mixing consigned goods with owned stock and recognizing revenue too early. Booking a sale when goods ship, rather than when the end customer buys, overstates revenue and distorts margins. Separating consigned inventory in your system, tracking every return, and reconciling against physical counts prevents most of these problems.
Does a consignor need to file a UCC financing statement?
In many cases, the answer is yes. Because the Uniform Commercial Code (UCC) treats a consignor as a secured party, a UCC-1 financing statement protects its claim to the consigned goods. Protection matters most if the consignee faces creditors or bankruptcy, though consignments below the $1,000 threshold may fall outside these rules.
Related posts
Explore more inventory and accounting guides:
- Ecommerce Accounting: A Guide for Small Businesses
- Backorder: Pros, Cons, Causes, and Best Practices
- Inventory write-off: How to account for damaged inventory
- A comprehensive guide to inventory write-downs
- How to manage consignment inventory: 6 best practices
- Unveiling inventory valuation methods: A comprehensive guide