Consignment accounting is the 'counting' and recording of details related to property owners (consignors) delivering and entrusting (consigning) materials or goods to agents (consignees) selling, returning or otherwise disposing of the transferred inventory.
'Consignments' refers to material goods transferred to (or to be transferred to) custodians for sale (for a defined period of time). In the U.S. and elsewhere 'consignment' can also describe the type of transaction: 'placing goods on consignment'.
Consignors retain ownership of consignments while goods are in the custody of selling agents. Ownership is transferred to buyers upon completion of payments, or consignors may relinquish ownership when unsold goods are donated, lost, stolen or destroyed.
Consignees do not take possession of consignments but should maintain inventory records of consignments for reconciliation and insurance purposes.
If charged with accounting for property in their possession consignees should maintain adequate property-casualty insurance. Written consignment agreements should name the responsible party(ies) for risk of loss.
Consignors typically pay delivery costs (carriage and freight). In the consignment-shop world consignors often deliver their goods to resellers' locations at their own expense. Some stores might provide a delivery service. Online consignment operations (and other forms of businesses) might have consignors 'drop ship' sold merchandise.
Responsibility for expenses (like repairs, cleaning, storage) related to consignments in custody should be spelled out in the consignment agreement. Shops often charge a separate fee for such additional services.
Consignees' commissions are usually agreed upon prior to delivery. They may be variable or fixed dollar or percentage amounts.
Upon sales of consigned goods, consignees realize assets (proceeds) and take on liabilities (amounts owed to consignors), recording a debit to cash and a credit to sales. That is the essence of accounting.
In a sense consignees 'float funds in escrow', particularly when consignors accept payment as store credit, or proceeds are retained until a minimum payout amount is reached. (Check with taxing authorities to see if on a cash basis, unpaid liabilities are taxable to consignors in the tax year.)
Some stores (of lesser repute) avoid making sufficient effort to get payment to consignors then enforce provisions for dismissing unpaid balances after some period of time. Those 'forgiven debts' are likely taxable, not to mention that from an accounting perspective, this is immoral if not illegal.
The elaborate details illustrated at double-entry-bookkeeping.com may be more complexity of consignment accounting than most store owners are required to know. Consignment programs do much of the accounting in the background and produce the reports needed to correctly 'account' for the transactions of the business.
A clothing manufacturer wants to distribute its dresses widely so to encourage stores to stock, display and sell the dresses, the manufacturer delivers 'free inventory' to retail stores 'on consignment', keeping ownership of the stock and agreeing to a commission to be paid for each dress sold. Periodically stores 'settle' with the manufacturer by sending the proceeds to the manufacturer after deducting the commission, and/or returning unsold merchandise after a designated period of time.
A consignor is an entity (person, organization, business) that places (consigns) merchandise (consignments, consigned inventory) with another entity (consignee) who takes possession of and responsibility for the merchandise and assumes the task of selling the merchandise for a commission. Consigning is the act of placing (entrusting) property with a consignee.
Consignment is an article placed with a custodian for sale, or the act of doing so.
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Consignment is one of those types of businesses with enough complexity to make business management nearly impossible without computerization.
In our 19 years we've heard prospective clients tell us of the hours they've spent trying to avoid 'technology', ranging from doing everything by hand (including writing price labs and hang tags, looking up items in written lists, printing receipts at POS). On the other hand those who took the leap into the electronic world might rather close their stores today than revert to running a shop without a computer. As one lady said, "I may as well have gotten a job at Home Depot. I would have made more money, had good benefits and worked way fewer hours."
One level up we've had many a call from shop owners giving up on trying to manage their businesses with spreadsheets which only supplanted the written lists of inventory. The tasks still remained of label and receipt printing, invoice processing, reporting and so on.
Those who can use a cell phone or a TV remote control can make consignment software their slave. It's easy but like a bicycle with a learning curve minus the scraps and bruises.
Consignment software is 'plug and play' but it's the next best thing:
Consignment does require some understanding to make best use of the app. Of course ownership of consignments remains with the consignors and payment is made after sales are processed.
A sophisticated program like Best Consignment Shop Software manages all aspects of consignment including variable payouts per consignor, discounting inventory every which way possible and streamlining the whole process from inventory in to out.
Settlement usually takes place a month after - to allow time for changes like refunds, returns, trades, etc. (A setting can be made in the program to not settle accounts where amounts owed are under a set amount.)
Payouts of course are typically made at the time of settlement and may be by check, cash, store credit or even to PayPal accounts. (A bonus % can be auto-applied by the program for patrons who settle for store credit, keeping money in the store, reducing payout efforts and encouraging those with credit to return to make purchases, thereby increasing revenue.)
Reports are of course critical to account for what's going on at any point in the process of running a business and making a profit.
BCSS includes over 300 accounting reports. Some of the most important reports are right on top and display with one press of a key, like F8 for inventory entered today,F9 for today's recap, F10 for today's sales and F11 for daily settlements.
The most frequently asked questions of consignment stores are, "What have I sold?" and "What's my balance?" Now there's a couple of ways to provide answers:
About the Author
Steve Henning is the founder and managing director of BCSS which has provided consulting services, support, software and hardware to consignment and resale-related shops since 2001. Mr. Henning has worked as a financial consultant since 1974 in key industries. He holds degrees from the U of Illinois and the American College.