Consignment accounting is a term used to refer to an arrangement whereby goods are sent by their owner (consignor) to an agent (consignee) who holds and sells the goods on behalf of the owner for a commission. It is important to understand that the agent never owns the goods.
Consignment Accounting Example
Both the owner and the agent maintain their own records, and the consignment accounting will be different for each party. The main points relating to consignment accounting and goods on consignment are best seen by way of an example.
Suppose an consignor (owner) agrees to consign goods to a consignee (agent) to sell by consignment. The consignor will purchase the goods and pay for them to the transported to the consignee. The consignee in return for a commission of 10%, will arrange for the goods to be distributed and sold.
The consignor (owner) has the following transactions relating to the purchase and transfer of the consignment goods:
- Purchase of goods – 3,000
- Carriage and freight – 350
and the consignee (agent) has similar transactions relating to the collection, storage and selling of the goods:
- Import duty – 200
- Selling expenses – 300
- Revenue – 7,000
Goods Transferred by the Consignor
Normally the goods will have been purchased together with other purchases and form part of the inventory of the consignor. The consignment accounting journal entry records the transfer of the goods from inventory to a consignment inventory account to indicate that the goods have been consigned to an agent.
| Account | Debit | Credit |
| Consignment inventory | 3,000 | |
| Inventory | 3,000 | |
| Total | 3,000 | 3,000 |
The consignment inventory accounting journal represents the transfer of inventory from the normal inventory account to a separate consignment inventory account. The inventory is still the property of the consignor, and no entry is made by the consignee.
No entry is made by the consignee.
Consignor Pays Expenses
The consignor pays the carriage and freight expenses.
| Account | Debit | Credit |
| Consignment inventory account | 350 | |
| Accounts payable | 350 | |
| Total | 350 | 350 |
As the expenses relate to the consignment and are a cost of bringing the inventory to its present location and condition, they are debited to the consignment inventory account. The credit entry as usual is either to accounts payable or cash depending on the terms agreed with the supplier.
No entry is made by the consignee.
Consignee Pays Expenses
The consignee pays the import duty (200) and selling expenses (300) on behalf of the consignor.
| Account | Debit | Credit |
| Consignor Personal Account | 500 | |
| Accounts payable | 500 | |
| Total | 500 | 500 |
The consignee pays expenses on behalf of the consignor so the debit entry is made to the personal account of the consignor representing monies due by the consignor to the consignee. The credit entry as usual is either to accounts payable or cash depending on the terms agreed with the supplier.
No entry is made by the consignor.
Consignee Sells the Goods
The consignee sells the goods on behalf of the consignor. In this example, we will assume for simplicity the goods are sold for cash.
| Account | Debit | Credit |
| Consignor personal account | 7,000 | |
| Cash | 7,000 | |
| Total | 7,000 | 7,000 |
The agent has sold the goods for cash. The credit entry is to the personal account of the consignor and represents an amount due by the consignee to the consignor as the goods were sold on the their behalf.
No entry is made by the consignor.
Consignee Records Commission
Under the consignment contract agreement the consignee is entitled to a commission of 700 (7,000 x 10%), and makes the following consignment accounting journal entry.
| Account | Debit | Credit |
| Consignor personal account | 700 | |
| Commission income | 700 | |
| Total | 700 | 700 |
The credit entry to the commission income account represents the income earned by the consignee on the consignment sales. The amount is due from the consignor and is therefore posted as a debit to the personal account of the consignor.
No entry is made by the consignor.
Consignee Accounts to the Consignor
The consignee now provides a summary to the consignor of all transactions it has made relating to the consignment. This report is referred to as an Account Sales Report.
| Revenue | 7,000 |
| Import Duty | 200 |
| Selling expenses | 300 |
| Commission | 700 |
| Net income | 5,800 |
The consignee now pays the balance on the personal account of the consignor (5,800) to the consignor and clears the account with the following journal entry
| Account | Debit | Credit |
| Consignor personal account | 5,800 | |
| Cash | 5,800 | |
| Total | 5,800 | 5,800 |
No entry is made by the consignor.
Consignor Records the Consignment Sales and Expenses
On receipt of the Account Sales Report from the consignee, the consignor completes the consignment accounting by accounting for the sales and expenses with the following bookkeeping entry.
| Account | Debit | Credit |
| Revenue | 7,000 | |
| Consignment inventory (import duty) | 200 | |
| Selling expenses | 300 | |
| Commission | 700 | |
| Cash | 5,800 | |
| Total | 7,000 | 7,000 |
It is important to note that the import duty of 200 is debited to the consignment inventory account as it is a cost of bringing the inventory to its current location and condition relating to the entire consignment, and needs to be taken into account when calculating the cost of goods sold in the next step.
The selling and commission expenses relate only to goods which have been sold and can be taken direct to the appropriate expense account.
In this simple example the debit entry to cash represents the remittance from the consignee with the account sales report, had the consignee not sent cash at the same time, the debit entry would have gone to the personal account of the consignee representing monies due (accounts receivable) from the consignee.
No entry is made by the consignee.
Consignor Records the Consignment Cost of Goods Sold
The consignor must now transfer the cost of goods sold from the consignment inventory account to the cost of goods sold account.
| Account | Debit | Credit |
| Cost of goods sold | 3,550 | |
| Consignment inventory account | 3,550 | |
| Total | 3,550 | 3,550 |
In this example, as all the inventory has been sold, the total on the consignment inventory account (3,000 inventory, 350 carriage and freight and 200 import duty) is transferred to the cost of goods sold account. Had all the inventory not been sold, then only a proportion of the inventory would be transferred and the balance would represent inventory still held by the consignee.
No entry is made by the consignee.
The net effect of these postings is summarized in the memorandum income statement below.
| Revenue | 7,000 |
| Purchases | 3,000 |
| Import duty | 200 |
| Freight and carriage | 350 |
| Cost of goods sold | 3,550 |
| Gross margin | 3,450 |
| Selling expenses | 300 |
| Commission | 700 |
| Operating expenses | 1,000 |
| Net income | 2,450 |
The 2,450 reflects the profit made by the consignor on this consignment.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.