If you’re in the business of selling physical goods (perhaps custom made iPhone cases or handmade baby toys or anything in between), there’s a good chance you’ve encountered the concept of consigned goods. But for someone just starting out, this might sound like a foreign concept, having meaning only in thrift store terms.
So let’s break down what consigned goods are and why understanding the concept might be important to your business…
What are Consigned Goods?
At the most basic level consigning is when you, the owner of something, put your product in the hands of someone else, while still retaining full ownership, with the intent that they sell it on your behalf. When they do sell it, they get a cut of the sale and you get the risk. So say you sell custom iPhone cases for $100 each but you don’t have an audience or good access to a market. But you know a merchant who does. If you decide to go the consigned goods route, you would pre-agree to a deal where the merchant takes an amount of inventory and for every custom iPhone case he or she sells, they keep, say, $10. It’s important to note that the merchant is not buying your iPhone cases from you. If they were doing that, they’d likely have a good idea of the demand and know that they could sell the product for $125 each. In that scenario though, they’re taking on more risk. Consignment on the other hand minimizes risk. In fact, it’s often a decent way to test demand. Worst case, the iPhone cases don’t sell and the merchant sends them back to you.
Pro tip: Anytime you’re entering into a consigned goods deal, it’s a good idea to discuss it with your lawyer and have them either draw up or review the agreement language.
Consigned Goods and Business Finances
From an accounting perspective, there are a few unique things to consider when it comes to consigned goods. Let’s stick with the $100 custom iPhone case example. When you consign inventory to the merchant who’s going to do the selling, there’s no specific recordkeeping task to be done. After all, the products haven’t technically sold yet. But when the merchant does sell some inventory, that’s where accounting tasks begin! Have a defined inventory and sales reporting schedule and make sure you’re seeing sales receipts or invoices. When a sale happens, you debit your cash account and credit your sales account. (Learn more about debits and credits.) And don’t forget your seller’s cut! If you’re consigning goods, create a “commissions” account in your chart of accounts. Debit that and credit accounts payable.
And there you have it: the basics of consigned goods. Have related questions? Email us anytime at email@example.com.