Is Consignment Included in Inventory?

Understanding how goods are accounted for is important, especially when they are not bought or sold in a traditional sense. Consignment is a common arrangement that raises questions about inventory accounting. It involves one party holding and selling goods legally owned by another. Clarifying roles and responsibilities in such an arrangement is fundamental to properly reporting these items on financial statements.

Defining Inventory and Consignment

Inventory refers to goods a company holds with the intention of selling them in the normal course of business. This includes raw materials, partially finished products, and finished goods ready for sale. Inventory is a current asset on a company’s balance sheet because it is expected to be converted into cash within one year. Accurate inventory accounting reflects a company’s financial health, impacting both the balance sheet and income statement.

Consignment is a business arrangement where one party, the consignor, provides goods to another party, the consignee, for sale. The consignee acts as an agent, marketing and selling the goods for the consignor. The consignor retains legal ownership of the goods until they are sold to a third-party customer. The consignee earns a commission once a sale is made.

The Principle of Ownership in Accounting

Assets are recorded on a company’s financial statements only if the company legally owns them. This principle determines who reports an asset, like inventory, on their balance sheet. Physical possession does not automatically confer ownership. For example, goods in a company’s warehouse are not assets if they are not legally owned.

This distinction maintains accurate financial records and provides a clear picture of a company’s financial position. Legal title to the goods is the primary determinant for inventory recognition. Accounting Standards Codification (ASC) 330 addresses how ownership affects inventory classification, including goods in transit and consignment arrangements. Understanding who holds legal title is necessary for proper accounting treatment.

Consignment and Inventory: The Consignor’s View

Goods held on consignment remain part of the consignor’s inventory. This is because the consignor retains legal ownership throughout the consignment period, even with physical possession transferred to the consignee. Until sold to an end customer, the consignor bears risks like damage, obsolescence, or theft.

Because ownership is retained, the consignor must report these consigned goods as inventory on their balance sheet. Their value is included in the consignor’s assets. When the consignee sells the goods, the consignor recognizes revenue and removes sold items from inventory records. The consignor also accounts for expenses related to consigned goods, such as shipping or storage costs, and the commission paid to the consignee.

Consignment and Inventory: The Consignee’s View

Consigned goods are not included in the consignee’s inventory. The consignee acts as an agent, holding the goods for sale on behalf of the consignor. Since the consignee never takes legal ownership, these goods are not considered assets of the consignee. Therefore, they do not appear on the consignee’s balance sheet as inventory.

The consignee’s role is to facilitate the sale and earn a commission. When a consigned item is sold, the consignee records the sales revenue and their earned commission. They remit the net proceeds, after deducting their commission, to the consignor. The consignee may keep separate records of consigned inventory for tracking, reconciliation, and insurance purposes, but not for asset recognition on financial statements.

Reporting Consigned Goods on Financial Statements

The accounting treatment of consigned goods directly impacts the financial statements of both the consignor and the consignee. For the consignor, goods sent on consignment are maintained as inventory on their balance sheet until a sale occurs. This ensures their assets accurately reflect goods they still legally own, regardless of physical location. When sold, the consignor recognizes revenue and transfers the cost of goods sold from inventory to the cost of goods sold on their income statement.

Conversely, the consignee’s financial statements do not show consigned goods as inventory on their balance sheet. These goods are not assets of the consignee because ownership remains with the consignor. The consignee’s involvement is reflected on their income statement only when a sale is made, recognizing the commission earned as revenue. This clear separation of accounting treatment based on ownership ensures financial statements accurately represent the economic substance of the consignment arrangement for both parties.