How do I handle consignment inventory in my books?
The fundamental rule with consignment is that whoever owns the goods records them as inventory. Physical possession doesn’t determine this. Ownership does. This trips people up because you might have products on your shelves that don’t belong to you, or products in another store that still belong to you.
If you’re a retailer holding consignment goods to sell on behalf of someone else, those items are not your inventory. Don’t record them as an asset on your balance sheet. When you receive consignment goods, you’re not making a purchase. You’re just taking physical custody of someone else’s property.
When a consignment item sells, record only your commission or markup as revenue. If you sell a piece for $100 and the consignor gets $60 while you keep $40, your revenue is $40. The $60 is a liability you owe the consignor until you pay them. Recording the full $100 as revenue and then the $60 as an expense technically works, but it inflates your sales figures and misrepresents the nature of the transaction.
You still need to track what consignment items are in your store for practical purposes. Many retailers use a spreadsheet or separate tracking system outside the accounting software. Some create a memo account or use inventory locations in their software to monitor consignment items without recording them as owned inventory.
If you’re the consignor placing your products with another retailer, the inventory stays on your books until it sells. Moving goods to a consignment partner doesn’t remove them from your inventory accounting. Consider creating a separate inventory account like “Inventory on Consignment” so you can distinguish between what’s in your warehouse versus what’s sitting at a retailer’s location.
Only recognize revenue when the consignee notifies you of a sale. At that point, you record the revenue, remove the item from inventory as cost of goods sold, and record the consignee’s commission as a selling expense.
Common mistakes include recording consignment goods received as purchases, removing inventory too early when shipping to a consignment partner, and recording the full sale price as revenue when you’re only earning a commission.
Reconcile monthly with your consignment partners. Compare their sales reports against your records. Discrepancies are easier to sort out when you catch them within weeks rather than discovering a year’s worth of mismatched records. If consignment is a significant part of your business model, working with Scottsdale area bookkeeping services that understand inventory can help you set up tracking systems that actually work.
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