Are Consigned Goods Included in Inventory?

Consigned goods involve a specific arrangement where one party, the consignor, provides goods to another party, the consignee, for sale. The core question of whether these goods are included in inventory depends entirely on which party is being considered. Understanding this distinction is essential for accurate financial reporting and proper asset management.

Understanding Consignment Arrangements

A consignment arrangement is a business model where the owner of goods, known as the consignor, sends them to another party, the consignee, who then holds and sells these goods on the consignor’s behalf. This agreement is formalized through a consignment contract, which typically outlines pricing, payment terms, and the responsibilities of each party. The unique aspect of this setup is that the consignor retains legal ownership of the inventory until a sale is made to an end customer.

The consignee acts as an agent, responsible for displaying, promoting, and selling the goods, but they do not purchase the goods themselves. This means the consignee does not tie up their capital in inventory upfront, reducing their financial risk. For example, a clothing manufacturer might consign products to a department store, where the store sells the items without owning them.

Inventory Reporting for the Consignor

Consigned goods are included in the consignor’s inventory. Since the consignor retains title to the goods until they are sold to a third party, these goods remain an asset on the consignor’s balance sheet. This holds true even if the goods are physically located at the consignee’s premises, potentially across the country.

The consignor must maintain accurate records of these goods, including quantities and descriptions, to reflect proper inventory levels in their financial statements. Until the consignee completes a sale, the consignor bears the risk of unsold inventory, obsolescence, or damage.

Inventory Reporting for the Consignee

Conversely, consigned goods are not included in the consignee’s inventory. This exclusion is due to the consignee never taking legal title to the goods. While the consignee has physical possession of the goods, they do not recognize them as assets on their balance sheet.

This arrangement allows the consignee to offer a wider variety of products without the financial burden of purchasing and holding that inventory themselves. However, the consignee typically maintains separate records of consigned items for reconciliation and insurance purposes.

Financial Statement Implications

The treatment of consigned goods has distinct implications for both the consignor’s and consignee’s financial statements. Revenue and the associated cost of goods sold are recognized by the consignor only when the consignee sells the items to the end customer, aligning with revenue recognition principles.

The consignee’s financial statements reflect a different picture. Instead, the consignee recognizes commission revenue only when a sale is made, not the full sales price of the item. This commission is a prearranged percentage of the selling price.