Accounting: The Language of Business - Vol. 2 (Intermediate: Part 131)

In India, philosopher and economist Chanakya wrote “Arthashastra” during the Mauryan Empire around the second century B.C. The book contained advice and details on how to maintain record books for accounts (investopedia.com).

Revenue Recognition (Part R)

by

Charles Lamson

Consignment Sales

A consignment sale is an arrangement in which a seller (referred to as the consignor) delivers goods to a third party (the consignee), who sells the goods to the customer. A consignment sale is an example of a principal-agent arrangement in which one party (the agent) acts on behalf of another party (the principal). In this case, the consignor is the principal and the consignee is the agent.

Consignment sales—for goods such as books, furniture, musical instruments, toys, automobiles, and sporting goods—are quite common in practice. For example, a retailer of musical instruments can hold a piano from a manufacturer that it will sell on a consignment basis. eBay drop-off sites make use of consignment sales.

Determining whether a particular arrangement is a consignment arrangement is based on whether the seller passes control to the other party. If so, then it is a normal sale. if not, then it qualifies as a consignment arrangement. The authoritative literature provides indicators that an arrangement is a consignment arrangement.

1. The seller controls the product until a specified event occurs, such as the sale to the ultimate consumer.

2. The seller can require that the product be returned to it or sent to another third party.

3. The third party does not have an unconditional obligation to pay for the product.

The parties must use judgment to determine whether control has passed on these indicators. if an arrangement is classified as a consignment arrangement, the consignee does not record the inventory on its books, and the consignor does not record revenue when the goods are delivered. Rather, on the delivery date, the consignee credits inventory and debits inventory on consignment, and the consignee makes no entry. The consignor records revenue, along with the commission expense and receivable or cash, upon notification that the consignee has sold the inventory. The consignor will also record cost of goods sold and remove the inventory on consignment from its books. When the consignee sells the inventory, it records commissions revenue and an amount that is due to the consignor for the sale. Example 8.25 illustrates recording consignment sales.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 410-413*

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