Consignment

Consignment is a selling arrangement in which the owner of goods, called the consignor, delivers merchandise to another party, called the consignee, who holds and attempts to sell the goods without ever taking ownership of them. Legal title stays with the consignor until an actual sale to a final customer takes place, which is the detail that matters most for accounting purposes: consigned merchandise is reported as part of the consignor's own inventory, not the consignee's, even though it is sitting physically on the consignee's premises.

A craftsperson, artist, or small manufacturer who lacks their own retail presence might place items with a local shop, which displays and sells them to customers on the owner's behalf in exchange for a commission on each sale. Consignment is also common in art galleries, antique dealers, used-book shops, and some wholesale-to-retail relationships, where a supplier wants its products available to end customers without the retailer having to commit cash to buying inventory outright. The consignee benefits from carrying inventory with no upfront purchase cost and no risk of being stuck with unsold stock, while the consignor benefits from wider distribution without having to run its own storefront.

Because the consignee never owns the goods, no sale is recorded, and no revenue recognized, until the consignee actually sells an item to an end customer. At that point the consignee typically remits the agreed share of the proceeds to the consignor, who recognizes the sale, and keeps the remainder as a commission, which the consignee records as its own revenue for the service of selling. Until a sale happens, the consigned goods remain on the consignor's balance sheet as inventory, and do not appear as inventory or as a liability on the consignee's books at all, since the consignee has neither bought nor owes for anything it has not yet sold.

The contrast with a normal wholesale purchase is sharp: if a retailer buys goods outright from a supplier, title transfers immediately, the retailer records the purchase as inventory and a liability or cash outflow, and the supplier recognizes a sale at that point regardless of whether the retailer later succeeds in reselling the goods. Under consignment, the supplier bears the risk that the goods never sell, since it retains ownership the whole time, while under an ordinary wholesale sale that risk shifts to the buyer the moment the purchase is made. This difference is also why consigned goods must be physically counted and excluded from the consignee's own year-end inventory count, and included instead in the consignor's, a detail that auditors check carefully during physical inventory observations at any retailer known to carry consigned merchandise.

Correctly classifying a relationship as a consignment rather than a sale affects both parties' reported revenue, inventory, and overall balance sheet size, which is why accounting standards look past the label a contract uses and examine the real substance of the arrangement — specifically, who bears the risk of the goods not selling and who retains the right to recall them. A business that quietly treats consigned goods it is merely holding as its own inventory, or a consignor that fails to keep consigned goods on its own books, misstates both companies' financial position, which is exactly the kind of substance-over-form question auditors are trained to probe whenever a retail or wholesale client's inventory arrangements look unusual.