Understanding On Consignment
The term “on consignment” refers to a business arrangement where goods are sent by a manufacturer or wholesaler to a retailer, but ownership of the goods remains with the sender until they are sold to the end customer. In this arrangement, the retailer acts as a sales agent for the sender and earns a commission on the goods sold. The consignor (sender) retains ownership of the goods until they are sold, at which point the retailer remits the proceeds, minus any commission or fees, back to the consignor. This arrangement allows the consignor to reach a wider market without bearing the risk of unsold inventory.
Key Points to Understand about On Consignment
- Definition of On Consignment:
- Ownership Retained: In an on consignment arrangement, the consignor retains ownership of the goods until they are sold to the end customer.
- Retailer Acts as Agent: The retailer, also known as the consignee, acts as an agent for the consignor and sells the goods on their behalf.
- Commission-Based Compensation: The retailer earns a commission or fee for each sale made, typically based on a percentage of the selling price.
- Examples of On Consignment:
- Art Galleries: Artists may consign their artwork to galleries, where the gallery acts as an agent and sells the artwork on behalf of the artist.
- Retail Stores: Manufacturers may send their products to retail stores on consignment, allowing the stores to display and sell the products without purchasing them upfront.
- Bookstores: Publishers may consign books to bookstores, where the bookstore sells the books and remits the proceeds, minus a commission, back to the publisher.
- Benefits of On Consignment:
- Reduced Risk for Consignor: The consignor bears minimal risk as they retain ownership of the goods until they are sold, reducing the risk of unsold inventory.
- Expanded Market Reach: Consigning goods to retailers allows the consignor to reach a wider market and target customers who may not be accessible through other channels.
- Cost-Effective Distribution: Consignment arrangements eliminate the need for the consignor to invest in distribution channels or incur costs associated with storing and managing inventory.
- Challenges Associated with On Consignment:
- Inventory Management: Consignors must carefully track their consigned inventory to ensure accurate accounting and prevent loss or theft.
- Payment Delays: Since the consignor only receives payment upon the sale of goods, there may be delays in receiving revenue, impacting cash flow.
- Risk of Damage or Loss: Consignors may bear the risk of damage or loss to the goods while in the possession of the consignee, depending on the terms of the agreement.
- Accounting Treatment of On Consignment:
- No Sale Recorded: The consignor does not record the sale of goods until they are sold by the consignee.
- Inventory Reporting: Consignors typically report consigned goods as inventory on their balance sheet until they are sold.
Conclusion:
On consignment arrangements offer benefits for both consignors and consignees by providing a low-risk way to distribute goods and expand market reach. However, careful planning and management are necessary to mitigate risks associated with inventory management, payment delays, and potential damage or loss of goods. By understanding the concept of on consignment and its implications, businesses can make informed decisions about utilizing this distribution strategy to achieve their objectives effectively.