With the help of new and modern marketing tools, businesses can now expand their sales and move beyond geographical boundaries. Firms use consignment transactions for the delivery of their products and accounting for such transactions is done in a standard manner. Let’s first understand the meaning of consignment.
Consignment Definition
The act of consignment is to hand over goods belonging to one person to another person without transferring the ownership of the goods. Consignment sale meaning in the context of goods relates to sending of goods for sale. This term is used in the shipping or transport of goods.
In the act of consignment, a person/firm sends goods to another person/firm for selling them on behalf of the former. The owner of the goods transfers only the possession of the goods in a consignment and retains the ownership over them.
The purpose of a consignment is to facilitate the delivery or transport of goods. The person who is responsible for keeping and transporting the goods of a party receives a commission for his services. He assumes the responsibilities and risks associated with the control and possession of goods.
Parties to a Consignment
There are two parties to a consignment transaction:
Consignor or Principal
Consignee or Agent
Let’s understand the consignor and consignee meaning in detail.
Meaning of Consignor or Principal- As per the consignor definition, the consignor is a party that sends the goods. He holds the ownership of the goods.
Meaning of Consignee or Agent: Consignee is the party that receives the goods. He does not have the ownership of the goods but has control and possession of goods.
The relationship between the consignor and consignee is that of a principal and agent. The consignor acts as the principal for the consignee, who becomes his agent.
Consignment Process
Let’s understand the step by step procedure of consignment:
The first step in a consignment involves the consignor and consignee entering into an agreement of consignment.
The consignee agrees to accept the possession of goods from the consignor
Both consignor and consignee agree upon the terms of their agreement and the commission payable to the consignee.
The consignor hands over the possession of goods to the consignee along with a proforma invoice.
The proforma invoice is a document that contains details about the goods transferred.
In the process of consignment, the consignor transfers only the possession of goods and not the ownership over them.
The consignee undertakes the transport and sale of these goods under his possession
The consignor pays the commission at agreed rates to the consignee for his services
The consignee sends a statement called Account Sales to the consignor. It contains:
Details of the sales made by the consignee
Details of the expenses incurred by him
Commission payable to him
Important Terms Related to Consignment:
Consignment Expenses
The consignee bears all the sales expenses and later recovers them from the consignor. The terms of agreement regarding the expenses can be changed by the parties if they want.
Consignment Number Meaning
Every consignment is allotted a unique consignment number that helps to track the consignment and to keep a record of all the consignment transactions.
Consignment Account Meaning
A consignment account is an account for goods that are sent to a person or company. This person or company are not the owners of the goods consigned to them but are responsible for selling them or returning the unsold goods to the owner. The value of the goods that are sent on consignment is charged to the consignment account. This account is prepared to ascertain the profit or loss of the consignor on a specific consignment.
Consignment Store Meaning
A consignment store definition states that it is a shop selling second-hand items on behalf of the original owner, who receives a percentage of the selling price.
FAQs on Consignment vs. Sale: Meaning and Key Differences
1. What is a consignment in the context of commerce?
In commerce, a consignment is a business arrangement where one person, the consignor (owner), sends goods to another person, the consignee (agent), to sell on their behalf. The key aspect is that the ownership of the goods is not transferred to the consignee; it remains with the consignor until the goods are sold to a final customer. The consignee earns a commission on the sales made.
2. What is the single most important difference between a consignment and a sale?
The most important difference lies in the transfer of ownership and risk. In a sale, both ownership and the associated risks (like damage or loss) are immediately transferred from the seller to the buyer. In a consignment, the consignor retains ownership and risk until the consignee sells the goods to a third party. For more details, you can explore the Consignment vs. Sale: Key Distinctions.
3. How does the relationship between the parties differ in a consignment versus a sale?
The relationship between the parties is fundamentally different in each arrangement:
- In a consignment, the relationship is that of a Principal and Agent. The consignor is the principal, and the consignee acts as their agent to facilitate a sale.
- In a sale, the relationship is that of a Creditor and Debtor. Once the sale is made, the seller becomes a creditor, and the buyer becomes a debtor until the payment is complete.
4. Who bears the risk of loss or damage to goods in a consignment arrangement?
The consignor (the owner) bears all risks associated with the goods, such as loss, theft, or damage, until they are sold by the consignee. Any unsold goods are the consignor's responsibility and are returned to them. The consignee is only expected to take reasonable care of the goods in their possession. The accounting for such events is detailed under Consignment Losses.
5. From an accounting perspective, what are the key differences between consignment and sale?
From an accounting standpoint, the treatment of consignment and sale differs significantly:
- Revenue Recognition: In a sale, revenue is recognised immediately. In a consignment, the consignor only recognises revenue after the consignee has sold the goods.
- Inventory: Goods sent on consignment remain part of the consignor's inventory until sold. In a sale, goods are removed from the seller's inventory immediately.
- Expenses: Expenses incurred by the consignee to sell the goods (like freight, storage) are typically borne by the consignor and are treated as business expenses for the consignor.
6. Why would a business choose a consignment model over a direct sale?
A business might prefer consignment for several strategic reasons:
- Market Expansion: It allows a consignor to introduce products into new markets without the cost of setting up a distribution network.
- Risk Mitigation for Retailer: The consignee (retailer) does not have to invest capital in inventory, reducing their financial risk if the products do not sell.
- Price Control: The consignor can maintain control over the final selling price of the product.
7. How is a consignment different from a joint venture?
While both involve collaboration, they are distinct arrangements. In a consignment, the relationship is that of a principal and agent, with the consignor retaining full ownership. In a joint venture, two or more parties (co-venturers) come together to share ownership, profits, losses, and control over a specific business project. A joint venture is a partnership for a limited purpose, whereas consignment is purely an agency agreement for the purpose of sale. You can learn more about the Features of Joint Venture Accounts to understand this better.
8. What is a proforma invoice and what is its role in a consignment?
A proforma invoice is a document sent by the consignor to the consignee along with the goods. It is not a real sales invoice and does not create a debt. Its purpose is to provide information to the consignee about the goods being sent, including their quantity, quality, and price (often the minimum selling price). This document helps the consignee with record-keeping and determining the sale price. It is purely informational, unlike a sales invoice which confirms a completed sale.
