Imagine walking into your store and seeing shelves stacked high with products, but you don’t own them. These items are on consignment, meaning they belong to the supplier until sold.
It’s an arrangement that offers plenty of benefits — lower upfront costs, less financial risk, and the flexibility to stock more products — but it also creates a unique set of challenges, especially when it comes to accounting.
How do you properly track inventory you don’t own? How do you handle payments, commissions, and revenue? And how can you ensure everything is accurate come tax time? Without a solid understanding of consignment inventory accounting, things can get messy fast. Let’s break down exactly how to handle consignment goods and stay on top of your financial game.
Understanding consignment inventory
Consignment inventory is a business setup that works differently from the norm. Instead of buying products outright, retailers (consignees) stock goods provided by suppliers (the consignors) and only pay for them after they’re sold. The supplier keeps ownership of the items until then, while the retailer earns a percentage of each sale as a commission.
It’s a win-win arrangement. For consignors, it’s a chance to expand their reach without the hassle or cost of opening more sales outlets. For consignees, it means lower upfront costs and less risk investing in inventory — they won’t be stuck with unsold stock. This setup is especially popular in fast-moving industries like fashion, electronics, and food, where inventory turnover is critical and unsold goods can lead to significant losses.
A consignment agreement usually spells out the key terms, like the commission percentage, how long the goods can stay on the shelves, and who’s responsible for shipping or handling unsold items. But while the model offers flexibility, it does come with a challenge: tracking inventory you don’t technically own. That’s where inventory management software becomes crucial to help retailers keep tabs on quantities, sales, and ownership details, preventing any confusion down the line.
Pros and cons of consignment inventory
Consignment inventory has its positives and negatives, whether you’re a consignor or a consignee. Let’s examine how each side benefits from — and struggles with — this business model.
Pros
- Lower risk for retailers: Retailers only pay 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 or wholesalers can get their products into more stores without the carrying cost of holding inventory or the cost of opening additional outlets. With vendor-managed inventory (VMI), suppliers can also keep a closer eye on stock levels, ensuring optimal product availability at retail locations without overstocking.
- More variety for customers: Consignment stores can offer a wider range of products to their customers without committing to large quantities upfront.
Cons
- Inventory headaches: Managing consignment inventory can be challenging, especially when tracking goods that aren’t technically yours. Add damaged inventory into the mix, and things get even more complicated. Deciding who takes responsibility for damage can be a grey area if the issue isn’t addressed clearly in a consignment agreement.
- Misunderstandings over terms: Clear communication is key since misunderstandings over commission rates, return policies, and time limits all lead to tension.
- Pressure to sell quickly: Retailers and wholesalers are often motivated to move products quickly, which can cause strain and urgency.
How to account for consignment inventory
In a consignment arrangement, the supplier and the retailer must account for the inventory differently. This involves a series of ledger accounts and specific journal entries. Here’s how to approach it to make sure your records are accurate on both ends.
Note that this is a very simple guideline. It doesn’t account for cost of goods sold, shipping expenses, or important duties. Contact a certified public accountant with any detailed questions about how to perform consignment accounting.
1. Recording goods sent on consignment
Once the goods are shipped to the retailer, the supplier still owns them, so they don’t go into the retailer’s inventory. Instead, the supplier records them in their books under consignment inventory, keeping them separate from their regular stock.
The supplier should enter 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 their inventory. Instead, they usually keep a record — a spreadsheet or tracking system — to monitor the stock they’re holding.
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. Meanwhile, the supplier records the consignment sales once they’re notified.
The retailer’s journal entry for the consignment sales should include:
- Debit: Cash or bank (because they’ve got the money now)
- Credit: Payable to supplier (to show what they owe for the sold items)
After being notified, the supplier’s journal entry should detail:
- 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.
The supplier’s journal entry for commission owed would record:
- 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’s gone out)
Retailer’s journal entry for commission received should note:
- 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 their regular inventory.
Supplier’s journal entry for returns:
- 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 in the first place.
A practical scenario: Accounting for consignment inventory
Here’s a practical scenario to help clarify the accounting process:
Supplier: ABC Handcrafted Furniture
Retailer: Trendy Interiors
- ABC sends $10,000 worth of tables to Trendy Interiors on consignment.
- Trendy Interiors sells tables worth $6,000 to customers.
- ABC charges Trendy Interiors 80% of the sales value ($4,800), and the retailer earns a 20% commission ($1,200).
- Trendy Interiors returns $4,000 worth of unsold tables to ABC.
Let’s break down how the journal entries would look.
1. Recording goods sent on consignment
When ABC ships $10,000 worth of tables to Trendy Interiors, the ownership remains with ABC. They adjust their inventory to reflect this.
ABC’s journal entry would look like:
- Debit: Consignment inventory $10,000
- Credit: Inventory $10,000
At this point, Trendy Interiors doesn’t record anything in their records (because they haven’t purchased the tables).
2. Recording sales
Trendy Interiors sells $6,000 worth of tables to their customers and collects payment. Here’s how the sale is recorded in their books.
Trendy Interiors’ journal entry:
- Debit: Cash $6,000 (money collected from customers)
- Credit: Payable to ABC $4,800 (amount owed to ABC)
- Credit: Commission income $1,200 (their 20% commission)
ABC recognizes the sale once Trendy Interiors informs them of the transaction:
- Debit: Accounts receivable $4,800 (amount owed by Trendy Interiors)
- Credit: Revenue $4,800 (income from the sale)
3. Recording commission payments
ABC pays the retailer their $1,200 commission for the sales:
- Debit: Commission expense $1,200
- Credit: Cash $1,200
Trendy Interiors’ journal entry reflects this, too:
- Debit: Cash $1,200
- Credit: Commission income $1,200
4. Returning unsold inventory
After the sales period ends, Trendy Interiors returns $4,000 worth of unsold tables to ABC.
ABC’s journal entry reflects this:
- Debit: Inventory $4,000
- Credit: Consignment inventory $4,000
Since Trendy Interiors never owned the unsold tables, they don’t record anything for the return.
Consignment inventory accounting best practices
Managing consigned inventory can be difficult, but with the right approach, you can make the process much smoother and more efficient. Here are four tips to help you keep things on track.
1. Invest in inventory management software
Tracking consignment inventory manually will take a lot of time and effort. A good inventory management system — like Fishbowl — is a game-changer. It tracks stock in real time, separates consigned goods from owned inventory, and automates inventory updates. This means fewer mistakes and less time spent on manual counts. Plus, you’ll have all the data you need for smooth accounting, which you can export to QuickBooks or Xero through an integration.
2. Clearly define agreement terms
When setting up a consignment deal, the more detail, the better. Agree on commission rates, payment schedules, and who’s responsible for unsold or even damaged items. Clear terms from the start make accounting easier and prevent confusion later on.
3. Reconcile your records regularly
If you’re not careful, small discrepancies can slip through. Make it a habit to check your records and match them to your actual physical inventory. Regular reconciliation helps you spot any discrepancies early and keeps your numbers and profits accurate.
4. Keep communication open
Consignment involves a partnership, so communication is vital. Share updates on sales, stock levels, and payments to keep everything transparent. This way, you can catch any issues early and address them before they become problems.
If you’re also using a VMI system, the right software integrates with both sides, allowing suppliers to track stock levels while retailers focus on sales.
Streamline your consignment inventory accounting with Fishbowl
Managing consignment inventory doesn’t have to be complicated. With Fishbowl, you can simplify the entire process and ensure your accounting stays accurate. And thanks to its seamless integration with QuickBooks, Fishbowl keeps your financial records up to date.
Ready to simplify your consignment inventory accounting? Book a demo today and see how Fishbowl can help you keep inventory and financial data aligned.