Consignment stock: on your shelf, but not on your books

Who owns it

In a consignment arrangement, the supplier — the consignor — retains ownership of goods that are physically held by you, the consignee. You sell them, and only then does a purchase happen.

The question is not where the goods are sitting. It is who bears the risk: if the stock is destroyed, damaged or never sells, whose loss is it? If the answer is the supplier's, it is consignment. If unsold goods cannot be returned and you owe for them regardless, it is a purchase with generous credit terms — whatever the agreement calls itself.

When it becomes a purchase

At the point of sale to the end customer, three things happen simultaneously and should be recorded as one transaction:

1. You sell the item and recognise the revenue.
2. You purchase it from the consignor at the agreed cost, recognising a payable.
3. The consigned quantity on hand falls by one.

This is why consignment is usually described as settled at cost, on sale. Nothing is owed until something sells, and what is owed is determined by what sold.

Why it must stay out of your valuation

Including consigned goods in your stock valuation overstates your assets by their full value and, if you have also recorded a payable, overstates your liabilities too. It makes the balance sheet describe a business that bought something it did not buy.

It also distorts every ratio anyone will look at: stock turnover, days of cover, the value tied up on shelves. A business with a large consignment arrangement can appear to be carrying twice the working capital it actually funds — which matters the moment a bank reads the accounts.

What to record, and what to reconcile

• The consignor against every consigned line, because two suppliers may consign the same product on different terms.
• Quantity received on consignment, separately from quantity purchased.
• Quantity sold, which is what drives settlement.
• Quantity returned to the consignor unsold.
• The agreed settlement cost, which may differ from the supplier's list price and may change during the arrangement.

The reconciliation the supplier will want is simple and should be producible on demand: opening consigned quantity, plus received, less sold, less returned, equals what is on your shelf now. If you cannot produce that statement, you are negotiating from their records rather than yours.

The reverse case

If you are the one consigning — your stock sitting in someone else's shop — everything inverts. Those goods are still yours and belong in your valuation, at your cost, even though they are nowhere on your premises. Leaving them out understates your assets and makes your stock count come up short by exactly the amount you placed elsewhere.

Which is the same requirement stated the other way round: stock has to have a location that is not necessarily one of your own, and a location does not imply ownership.