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Consigned Inventory: Definition, Accounting, and Advantages
Supply chain management is integral to running a successful business that sells products. In fact, it’s virtually impossible to succeed in the long run without appropriately managing inventory. One such inventory management strategy to consider is consigned inventory, which we’ll discuss in detail today.
This post will discuss consigned inventory, explore consignment inventory arrangements, and explain how Xledger’s financial automation software can enhance consigned inventory management.
Consigned Inventory: The Basics
Consigned inventory refers to goods sent by their owner (consignor) to another party (consignee), who holds the goods and sells them on behalf of the owner. The unique aspect of this arrangement is that the consignor retains ownership of the inventory until the goods are sold.
Such arrangements offer numerous benefits, which we’ll explore more in a moment. However, they include reduced risk for the consignee and less capital tied up in inventory for the consignor. Businesses dealing with bulky items or rapid obsolescence cycles find this particularly advantageous.
Visit our accounting glossary next to learn even more about consignment inventory.
Industry examples include:
- Automotive industry: Car dealerships often use consigned inventory to showcase a variety of models without purchasing outright.
- Retail: Department stores might have consigned sections for designers who wish to test the market.
- Electronics: Consumer electronics retailers use consignment to manage fast product life cycles.
Accounting for Consigned Inventory
Next, let’s examine the general accounting process for consigned inventory. This can be somewhat complex, but it’s important to understand the financial implications of such arrangements.
Initial Inventory Valuation
Upon receipt of the consigned goods, the consignee records them as inventory with an offsetting liability to the consignor on their balance sheet. The value of the inventory is determined by either the consigned price or the estimated market value, whichever is lower.
Recording Sales
When the goods are sold, the consignee records a sale and reduces the inventory and liability accounts. The amount recorded as sales would be the selling price of the goods, less a commission paid to the consignor.
Unsold Inventory
Any unsold inventory at the end of an accounting period is still recorded on the consignee’s balance sheet as a liability to the consignor. This ensures the consignor still has ownership and control over the goods.
Profit Sharing
Once the goods are sold, the remaining amount after deducting sales and commission expenses is shared between the consignee and consignor according to their agreed-upon profit-sharing ratio.
Cost of Goods
The cost of goods sold for consigned inventory is recorded as the consignee’s purchase price plus any added costs, such as transportation or storage fees. This amount is deducted from the sales revenue to determine the gross profit earned on the sale.
Inventory Reporting
In financial statements, consigned inventory is typically reported separately from owned inventory. This allows for a clear distinction between goods owned and those held on behalf of another party.
Advantages of Consigned Inventory
We’ve briefly touched on the benefits of this supply chain management style, but there’s plenty more to say.
Here’s a bit more about some of the many benefits it boasts:
Cost Savings
Consigned inventory can lead to significant cost savings for businesses. By adopting consignment arrangements, companies can minimize their overhead costs by reducing the stock they must keep on hand.
Since the consignor owns consigned inventory until it is sold, the consignee does not have to invest capital in purchasing inventory upfront. This reduction in inventory holding costs can enhance cash flow and improve the overall economic health of the business.
Supplier Relationships
Consigned inventory arrangements can foster stronger relationships with suppliers. By sharing the risks associated with inventory management, consignors and consignees develop a sense of mutual trust and collaboration.
Suppliers are often more willing to work closely with consignees to optimize inventory levels, address supply chain issues, and accommodate fluctuations in demand.
This collaboration can result in more favorable terms and ultimately benefit both parties involved thanks to:
- Better communication
- Increased reliability from suppliers
- Improved understanding of market demand
Flexibility
Another critical advantage of consigned inventory is its flexibility. Consigned goods enable businesses to maintain an adaptable inventory that can quickly respond to changes in demand and market conditions.
Since consignors retain ownership of the inventory until it is sold, consignees can adjust their inventory levels without incurring the costs associated with excess or obsolete inventory.
This agility allows businesses to better meet customer demand, minimize stockouts, and capitalize on emerging market opportunities.
Reduced Risk of Obsolescence
Consigned inventory arrangements can also help mitigate the risk of obsolescence for consignees. Again, because consignors retain ownership of the inventory until it is sold, they bear most of the risk associated with inventory obsolescence.
Consignees are not responsible for purchasing inventory upfront. As such, they are not left holding obsolete stock if market conditions change or demand shifts. This alleviates concerns for consignees and enables them to focus on selling current inventory without the fear of incurring losses due to obsolescence.
Implementing Consigned Inventory Management with Xledger
Xledger provides a cloud-based financial software solution perfectly poised to manage consigned inventory.
Features include:
- Inventory Tracking: Xledger’s system handles purchasing, restocking, and dispatch, which fits seamlessly with consigned inventory control.
- Procurement Workflow: Automates and integrates the purchase order and invoice matching process.
- Intercompany Transactions: Makes managing the flow of consigned goods between different entities easier.
- Multi-Currency and Multi-Entity Management: Proving invaluable for businesses operating internationally or with subsidiary entities.
- Accounts receivable/payable: Offers advanced payment and vendor management functions, keeping track of financial flows.
- Reporting and Analytics: Xledger provides powerful BI tools to analyze inventory turns and sales data.
FAQs about Consigned Inventory
Here are answers to frequently asked questions related to consigned inventory.
What is an example of consigned inventory?
An example of consigned inventory is when a manufacturer or supplier provides goods to a retailer but retains ownership of those goods until they are sold to the end customer.
For instance, a clothing manufacturer might consign its products to a department store, where the store displays and sells the items to customers. However, until a customer purchases the clothing, it remains the manufacturer’s property.
How do you account for consigned inventory?
Consigned inventory is typically not recorded as an asset on the consignee’s balance sheet until it is sold. Instead, it is often disclosed in the financial statements’ footnotes or the inventory disclosure section.
The consignor continues to recognize the inventory on its balance sheet until it is sold, at this point, the consignee records the sale and recognizes revenue.
Is consigned inventory a current asset?
Consigned inventory is not typically considered a current asset on the consignee’s balance sheet because legal ownership of the inventory remains with the consignor until it is sold. Therefore, it is not included in the consignee’s inventory balance until a sale occurs.
What is a consigned item?
A consigned item is a product or piece of inventory provided by one party (the consignor) to another (the consignee) for sale, display, or distribution. However, the consignor retains ownership of the item until it is sold to the end customer.
Consignment arrangements are commonly used in a variety of industries, including:
- Retail
- Manufacturing
- Automotive
- Healthcare
What does it mean to consign inventory?
Consigning inventory means transferring ownership of goods from one party (the consignor) to another (the consignee) for sale, display, or distribution. However, the consignor retains legal ownership of the inventory until it is sold to the end customer.
A consignment agreement typically governs these arrangements.
This will outline the terms and conditions of the arrangement, including:
- Pricing
- Payment terms
- Responsibilities of each party
Who owns consigned inventory?
The consignor owns it until it is sold to the end customer. The consignor retains legal ownership of the inventory throughout the consignment period, even though the goods may be in the consignee’s possession for display or sale.
Ownership of the inventory is only transferred to the consignee upon sale to the end customer. At this time, the consignee recognizes revenue, and the consignor records the sale on the consignor’s financial statements.
Consigned Inventory Accounting with Xledger
Consigned inventory is a flexible inventory management approach suited for businesses looking to minimize risks and optimize cash flow. Xledger’s financial automation software helps companies effectively manage their consigned inventory with a high degree of efficiency and insight.
Now that you’ve learned essential information on consigned inventory, we invite you to see Xledger in action. Book a demo today to learn how we can help you optimize your consigned inventory management.
Remember, a robust financial management system like Xledger can elevate your inventory management strategies and drive success in modern business operations.
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