In consignment accounting, it is essential to understand how financial transactions are recorded. When a consignee receives goods from the consignor, they must record the transaction correctly to reflect the receipt of inventory. One of the key questions in this process is: Which account does the consignee debit upon receipt of goods?
This topic will explain the accounting treatment of consignment transactions, focusing on the debit and credit entries involved. It will also discuss why the consignee does not immediately recognize the goods as an asset, how commission and expenses are handled, and the impact of the consignment process on financial statements.
1. Understanding Consignment Accounting
1.1 What Is Consignment?
Consignment is a business arrangement where the consignor (supplier) sends goods to the consignee (seller) to sell on their behalf. The ownership of the goods remains with the consignor until they are sold. The consignee is only responsible for selling the goods and earning a commission.
1.2 How Does Consignment Accounting Work?
Unlike regular sales, in consignment:
- The consignor records the inventory in their books until it is sold.
- The consignee does not record the inventory as their asset because they do not own the goods.
- The consignee records expenses and sales revenue separately in their accounts.
2. Which Account Does the Consignee Debit Upon Receiving Goods?
2.1 No Immediate Debit to Inventory Account
Since the consignee does not own the goods, they do not debit the inventory account upon receipt. Instead, they maintain a memorandum record of the goods received.
2.2 Recording Goods Received on Consignment
When the consignee receives goods, they typically debit the “Consignment-in” or “Goods Received on Consignment” account (a temporary account used for tracking). The journal entry is:
Journal Entry for Receiving Goods (Memorandum Record Only):
No formal journal entry is made, but a memorandum record is maintained.
2.3 When Expenses Are Incurred by the Consignee
If the consignee incurs expenses (e.g., freight, storage, advertising), they record:
Dr. Consignor's Account (for expenses incurred)
Cr. Cash/Bank (if paid immediately)
This entry reflects the amount spent on behalf of the consignor, which will later be reimbursed or deducted from sales proceeds.
2.4 When Goods Are Sold
Once goods are sold, the consignee must record the transaction and remit proceeds (after deducting expenses and commission) to the consignor. The journal entry:
Dr. Cash/Bank (total sales revenue)
Cr. Consignor's Account (payable to consignor)
Cr. Commission Income (for consignee's commission)
3. Why Doesn’t the Consignee Debit the Inventory Account?
3.1 Ownership Belongs to the Consignor
Since the consignee does not own the goods, they cannot record them as inventory. Instead, the goods remain as inventory in the books of the consignor until sold.
3.2 Revenue Recognition Rules
Accounting principles state that revenue is only recognized when:
- The consignee sells the goods to a third party.
- The consignee earns their commission from the sale.
Thus, the consignee does not recognize inventory but only records revenue and expenses related to the consignment.
4. How the Consignor Records the Transaction
While the consignee does not record inventory, the consignor makes the following entries:
4.1 When Goods Are Sent on Consignment
Dr. Consignment Account (Cost of Goods Sent)
Cr. Inventory (Stock Reduction)
4.2 When Expenses Are Paid by the Consignee
Dr. Consignment Account (for expenses incurred by consignee)
Cr. Consignee's Account (to be reimbursed later)
4.3 When Goods Are Sold by the Consignee
Dr. Consignee's Account (for total sales value)
Cr. Consignment Account (revenue recognition)
After deducting commission and expenses, the consignee sends the remaining amount to the consignor.
4.4 When the Consignee Remits Payment to the Consignor
Dr. Bank (Cash received)
Cr. Consignee's Account (Clearing the balance)
5. Example of a Consignment Transaction
Scenario:
ABC Ltd. (Consignor) sends goods worth $10,000 to XYZ Traders (Consignee) for sale. XYZ incurs $500 for transportation and sells the goods for $15,000, charging a 10% commission.
Journal Entries in the Books of the Consignor
1. Sending Goods on Consignment:
Dr. Consignment Account $10,000
Cr. Inventory $10,000
2. Recording Expenses Paid by the Consignee:
Dr. Consignment Account $500
Cr. Consignee's Account $500
3. Recording Sales Made by Consignee:
Dr. Consignee's Account $15,000
Cr. Consignment Account $15,000
4. Deducting Commission (10% of $15,000 = $1,500) and Expenses ($500):
Dr. Commission Expense $1,500
Dr. Consignment Expenses $500
Cr. Consignee's Account $2,000
5. Receiving Payment from Consignee ($15,000 – $2,000 = $13,000):
Dr. Bank $13,000
Cr. Consignee's Account $13,000
Journal Entries in the Books of the Consignee
1. Recording Consignor’s Expense Payment:
Dr. Consignor's Account $500
Cr. Cash/Bank $500
2. Recording Sales Proceeds:
Dr. Cash/Bank $15,000
Cr. Consignor's Account $15,000
3. Deducting Commission:
Dr. Consignor's Account $1,500
Cr. Commission Income $1,500
4. Sending Net Proceeds to Consignor ($15,000 – $2,000 = $13,000):
Dr. Consignor's Account $13,000
Cr. Bank $13,000
6. Conclusion
When a consignee receives goods, they do not debit an inventory account because the ownership remains with the consignor. Instead, they keep a memorandum record of goods received and only record financial transactions related to sales, expenses, and commission.
Understanding the accounting treatment of consignment transactions helps businesses maintain accurate financial records and comply with accounting principles. Whether you are a consignor or a consignee, correctly recording transactions ensures transparency, accountability, and financial clarity in business operations.