On consignment is a business arrangement in which goods are placed by their owner (the consignor) in the care of a third party (the consignee) to sell. The consignee agrees to sell the products and return to the consignor the proceeds from the sales, minus a commission fee. This practice is common in various retail environments, including galleries, second-hand stores, and certain types of wholesale and brokerage transactions.
How Does Consignment Work?
Basic Structure
- Consignor: The owner of the goods who sends the items to the consignee.
- Consignee: The agent or third party who agrees to sell the goods on behalf of the consignor.
- Commission: The fee paid by the consignor to the consignee, usually a percentage of the sale price.
Financial Arrangements
On consignment, the consignor retains ownership of the goods until they are sold. The consignee:
- Does not pay for the goods upfront.
- Sells the goods and sends the sale proceeds to the consignor.
- Deducts an agreed-upon commission from the payment remitted to the consignor.
Accounting Treatment
From the perspective of inventory management, consigned goods are recorded differently:
- Consignor: Keeps the goods in their inventory until sold.
- Consignee: May list the goods in a separate consignment inventory account.
Applications and Examples
Art Galleries
Art galleries often use consignment arrangements to sell artwork. Artists place their works in the gallery, which then markets and sells the art pieces. The gallery earns a commission on each piece sold, and unsold artworks are returned to the artist.
Retail Stores
Consignment is popular in retail scenarios like second-hand shops, where individuals bring in items like clothing or electronics for the store to sell. In these cases, the store retains a portion of the sale price as a commission.
Real Estate and Vehicle Sales
In some cases, real estate agents and car dealerships may operate on a consignment basis, listing properties or vehicles that belong to owners and earning commissions upon completing a sale.
Types of Consignment Arrangements
Open Consignment
There is no fixed term for how long the consignee will attempt to sell the goods, which can be returned to the consignor at any time if they remain unsold.
Closed Consignment
Goods must be sold within a specified period, or else they are returned to the consignor.
Special Considerations
Legal and Contractual Obligations
Both parties need to clearly define terms in a consignment agreement, such as:
- Duration of the consignment period.
- Commission rates.
- Responsibility for damage or loss of goods.
Risk Considerations
For the consignor, risks include:
- Goods may not sell in the expected timeframe.
- Deterioration or damage to goods while in the consignee’s possession. For the consignee, risks include:
- Investing resources in marketing and selling the goods without being certain of compensation if the goods do not sell.
Tax Implications
Consignors must report income when goods are sold, while consignees report commissions earned.
FAQs
What are the benefits of selling on consignment?
- Reduced upfront costs for consignees.
- Expanded market reach for consignors.
How is consignment different from outright sale?
- Ownership: In consignment, the consignor retains ownership until the sale, whereas in an outright sale, ownership transfers immediately.
What should be included in a consignment agreement?
- Names of parties.
- Description of goods.
- Commission rate.
- Duration of consignment.
- Responsibilities of each party.
Related Terms
- Consignee: The party selling the goods on behalf of the consignor.
- Consignor: The owner of goods who places items with a consignee.
- Commission: Fee earned by the consignee for selling the goods.
Summary
Consignment is a strategic business arrangement beneficial for both consignors and consignees. It minimizes upfront costs for consignees and provides a method for consignors to reach broader markets. Successful consignment arrangements require clear agreements, understanding of risks, and careful management of financial and legal responsibilities.
References
This broad explanation provides the necessary insights into consignment arrangements, their applications, benefits, and related considerations, thus serving as a comprehensive guide for understanding this business practice.
