What is Consignment?
Consignment is the arrangement of a system where the goods are left in the possession of an authorized third party to sell those particular goods. Generally, the consignor is the one who receives a percentage of the revenue from the sale, at times a good percentage, this is known as his commission.
Consignment is done in many cases such as artwork, clothing, accessories, and also to sell books. The retail sales at times can be perceived as a special form of consignment where the producers rely on the retail stores to sell their products to the end consumers, the second-hand stores and the thrift stores are moreover engaged with the practice of consignment.
Understanding the term ‘Consignment’
We will understand precisely about the term ‘consignment’ in the following points:
Consignment is an arrangement where the goods of the producers are left with a third party to sell may be the retailers.
The party who sells the goods on consignment receives a portion of the sum of profit, either as a flat and fixed rate fee or commission.
Selling through a consignment arrangement can be of a low-commission, with low-time-investment way of selling items or services.
Most of the consignment shops and online dealers will offer the terms, while some will negotiate.
Consignment is advantageous to those who don't own a physical store or online marketplace in which to sell their goods.
Terms of Consignment
The Manufacturers and the Wholesale dealers come in terms of consignment as they find it very profitable to sell their goods through an agent. An agent who sells such goods on behalf of the consignor and the risk the remains with the consignor or principal.
The Goods that are sent by the consignor are known as the outward consignment outward, while the goods received by the consignee are known as the inward consignment. The relationship between the consignor and consignee is of a principal and agent only. The terms of consignment must be well known by an accountant. Terms like the following is prevalent while learning commission:
Trade Consignor:
Trade consignor is the person or the producer of goods who sends the goods to the consignee or to other agents like a manufacturer or the wholesale dealer.
Consignee:
Consignee or agent is the person to whom the goods are sent. Goods received by the consignees to resell are known as inward consignment.
Ordinary Commission:
The ordinary commission is the normal fees that is payable by the consignor to the consignee for the sale of goods. While, if there is no guarantee for the collection of money from the consumer then the percent of the commission is much lower in such case.
Del Credere Commission:
Del Credere Commission is the additional sum of payment which the consignor pays to the consignee to do extra than just selling like for taking the responsibility of collection of debt from the customers.
Account Sales:
This is a periodical statement where a consignee prepares and sends the same to the consignor. This statement contains all the details of sales (whether sold by cash or through credit), Expenses incurred, and the amount of commission which is due in particular items, goods destroyed in transit.
Proforma Invoice:
‘Proforma invoice’ is sent by the consignor in the form of an invoice to the consignee. The Proforma Invoice contains the details regarding the nature of goods, the quantity of such goods, the weight of the goods, and other measurements related to the particular goods, its price and other details are specified in a proforma etc.
FAQs on Terms of Consignment Simplified
1. What is consignment in simple terms?
Consignment is a business arrangement where the owner of goods, known as the consignor, sends them to an agent, called the consignee, to sell on their behalf. The key point is that the consignor retains ownership of the goods until they are sold. The consignee earns a commission for making the sale.
2. Who are the two main parties involved in a consignment agreement?
There are two primary parties in any consignment transaction:
- The Consignor: This is the person who owns the goods and sends them to the agent. They bear all the risks associated with the goods.
- The Consignee: This is the agent who receives the goods, holds them, and sells them to customers on behalf of the consignor.
3. What is the main difference between a consignment and a regular sale?
The biggest difference lies in the transfer of ownership. In a regular sale, ownership and possession of the goods are transferred to the buyer immediately. In a consignment, only possession is transferred to the consignee; ownership remains with the consignor until the final customer buys the goods.
4. What are the different types of commission a consignee can receive?
A consignee can earn a commission in a few different ways:
- Ordinary Commission: A standard percentage on the total sales value.
- Del Credere Commission: An extra commission for guaranteeing payment from credit sales. If a customer doesn't pay, the consignee bears the loss.
- Overriding Commission: An additional commission for selling goods above a certain price set by the consignor.
5. Why is it important that ownership of goods does not transfer to the consignee?
This is the core of the consignment model. Because the consignor retains ownership, they also retain the risk. This means the consignee does not have to pay for the goods upfront and can return any unsold items without any loss. It allows the consignee to stock goods they might not otherwise afford, and it allows the consignor to place products in different markets with less risk for the seller.
6. What is a pro-forma invoice and why is it used in consignment?
A pro-forma invoice is a document sent by the consignor to the consignee along with the goods. It looks like a sales invoice but is not a demand for payment. Its purpose is purely informational, stating the quantity, type, and price of the goods. It helps the consignee with record-keeping and setting a selling price.
7. In what situations would a business prefer using a consignment model over selling directly?
A business might choose a consignment model to enter a new market without setting up its own stores. It's also useful for launching new or expensive products, as retailers (consignees) are more willing to stock them without the financial risk. For the consignee, it's a great way to offer a wider variety of products without investing in inventory.
8. Who is responsible if goods are damaged while at the consignee's shop?
Since the consignor is the owner of the goods until they are sold, they are typically responsible for any loss or damage. The risk of unsold or damaged stock remains with the consignor, not the consignee. This is a fundamental difference compared to a regular sale, where risk transfers to the buyer.
