Consignment inventory: how to track stock you don't own

Selling goods on consignment lets a shop fill shelves without paying for the stock first. The catch is that the goods belong to someone else until a customer buys them, so they need their own records, counts and payment reports.

What is consignment inventory?

It is merchandise held by a shop (the consignee) but owned by the person who supplied it (the consignor). The shop pays nothing at delivery. When an item sells, the shop keeps its agreed share of the price and owes the rest to the consignor.

The IRS describes this division of ownership in Publication 334. Title stays with the consignor even after the consignee has the goods, and the goods remain in the consignor's inventory until they sell. That ownership settles whose stock count the goods belong in and who loses out if they never sell.

How does consignment work for retailers?

1. Sign a written agreement before any goods arrive.
2. Check each item in. Record its description, condition and agreed price, and give the consignor a signed copy of the intake list.
3. Tag every item with a code that identifies the consignor.
4. Sell the goods at the agreed price and record which consignor each sold item belongs to.
5. Pay the consignor's share on the agreed schedule, with a report of what sold.
6. At the end of the term, return or dispose of unsold goods as the agreement states.

Consignment vs wholesale

Wholesale gives the shop control of price and clearance. Consignment ties up less cash, but every sale creates money owed and more record keeping.

Consignment agreement terms to put in writing

A one-page agreement suits many small arrangements if it answers these questions:

• The consignment split. The share of the sale price each side keeps. Splits vary, so agree a number rather than assume a standard one.
• Pricing. Who sets the price, and whether the shop may reduce it after a set time on the shelf.
• Payment timing. How often the shop pays out, by what method, and whether a small balance carries over.
• Unsold goods. How long the agreement lasts, when the consignor must collect unsold items, and what happens to items left behind.
• Damage and theft. Who pays if an item is broken, lost or stolen in the shop.
• Insurance. Whether the shop's policy covers goods it does not own. Ask your insurer.
• Customer returns. How a refund works if the consignor has already been paid.
• Ending the agreement. The notice each side gives and how the final payment works.

The Uniform Commercial Code's definition in section 9-102 covers some deliveries to a merchant for sale, with conditions such as a value of $1,000 or more per delivery. Where it applies, it can affect what happens to consigned goods if the shop's creditors make a claim, so ask a lawyer to review a large agreement.

Consignment inventory management day to day

Staff should sell consigned items like anything else, while your own stock figures never include them.

• Tag each item. Build the consignor into the item code, such as C014-0032 for consignor 14, item 32 (a fictional scheme). The SKU guide covers designing codes people can read.
• Keep separate records. Hold a list for each consignor, apart from your owned stock, and keep their contact details with your supplier list.
• Count them separately. Check consigned items against each consignor's list. The free count worksheet holds up to 50 lines with expected and counted quantities and a recount column, so one sheet per consignor suits a small arrangement.
• Record the code at sale. If your till cannot show it, write the code on the sale record. For a printed record, the free receipt tool takes up to 25 item lines with descriptions you enter.

Consignment inventory tracking with a simple ledger

One ledger row per item, with a status that changes as the item moves, answers most questions a consignor will ask. This fictional example covers one consignor's month.

Keep a short, fixed set of statuses: on hand, sold, returned and damaged. An item missing at a count keeps its own status until you find it or settle it under the agreement.

Calculating a consignment payout

In the fictional ledger, three items sold in September for a total of US$125.00. Under a fictional 60/40 split in the consignor's favor, the consignor receives US$75.00 and the shop keeps US$50.00. These figures show the arithmetic, not a typical rate.

Work out the split on the price before sales tax unless the agreement says otherwise, and check your state's rules on collecting tax for consigned goods. Send a report with every payment listing the period, each sold item with its code, date and price, any agreed deductions, the amount paid and the items still on hand.

Consignment accounting basics

Publication 334 states the consignee's side plainly. Do not include merchandise you receive on consignment in your inventory. Include your profit or commission in income when you sell the item or receive your share, depending on your accounting method. In practice, consigned goods stay out of your inventory value, your income is your share, and the consignor's share is money you owe until the next payment. Your accountant can confirm the treatment, including card fees and refunds.

When consignment suits a small shop

Consignment tends to work well when you want to test a new product line or a local maker without buying stock, when the goods are one of a kind or secondhand, or when cash for buying stock is limited.

It works less well when:

• A product sells steadily and needs regular reordering, where owning it gives you control of price and supply.
• Nobody has time each period for intake, counts and payment reports.
• Shelf space is scarce, since a consigned item earns only your share of its price.

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