Journal Entries for Consignment Inventory: A Complete Guide

Quick Answer: How to Record Consignment Inventory

In a consignment arrangement, the consignor (owner) retains ownership of inventory until it is sold by the consignee (seller). The consignor does not recognize revenue when goods are shipped to the consignee — revenue is only recognized when the consignee sells the goods to an end customer. The consignee does not record consigned inventory as an asset on its balance sheet. Instead, the consignee records a commission or fee for facilitating the sale.

What Is Consignment Inventory?

Consignment inventory is a business arrangement where a supplier (the consignor) places goods at a retailer's location (the consignee), but legal title and ownership remain with the consignor until the goods are sold to a third party. This is common in industries such as art galleries, automotive parts, furniture retail, and specialty manufacturing.

Under ASC 606 — Revenue from Contracts with Customers, control has not transferred to the consignee when goods are shipped on consignment. The consignee is acting as an agent, not a principal. Therefore, the consignor cannot recognize revenue at the point of shipment — revenue recognition occurs only when the consignee sells the goods to an end customer.

Journal Entries for the Consignor (Owner)

The consignor maintains the inventory on its books throughout the consignment period. The key accounting steps are: (1) transfer inventory to consignment, (2) recognize revenue and COGS when the consignee sells the goods, and (3) record the consignee's commission as a selling expense.

Scenario: Consignor Ships $10,000 of Inventory

A furniture manufacturer (consignor) ships inventory with a cost of $10,000 to a retail showroom (consignee). The consignee sells the goods for $18,000 and earns a 15% commission ($2,700).

Step 1: Transfer Inventory to Consignment

The consignor reclassifies the inventory to a separate Consignment Inventory account. This keeps the inventory on the consignor's balance sheet but distinguishes it from goods held in the consignor's own warehouse. No revenue is recognized at this point.

Step 2: Consignee Sells the Goods — Revenue Recognition

The consignor records the full $18,000 as revenue (gross reporting as principal) and the $2,700 commission as a selling expense. The net cash the consignor receives from the consignee is $15,300 ($18,000 − $2,700). For more on COGS treatment, see our guide on journal entries for cost of goods sold.

Journal Entries for the Consignee (Retailer)

The consignee does not record the consigned goods as inventory or a liability. Instead, the consignee records only the commission earned as revenue when the goods are sold.

Step 1: Receipt of Consigned Goods — No Journal Entry

The consignee makes no journal entry when receiving consigned inventory. The goods do not meet the definition of an asset for the consignee because the consignee does not control them. However, the consignee should maintain a memorandum record (off-balance-sheet tracking) of the consigned goods for operational purposes.

Step 2: Sale of Consigned Goods — Commission Recognition

The consignee records only the $2,700 commission as revenue — not the full $18,000 selling price. Under ASC 606, the consignee is an agent in this transaction and reports revenue on a net basis.

Balance Sheet Presentation of Consignment Inventory

For the consignor, consignment inventory appears as a separate line item under current assets on the balance sheet. It is not combined with regular finished goods inventory because the consigned goods are at a different physical location and are subject to different risks.

For the consignee, consigned goods do not appear on the balance sheet at all. The consignee's only financial statement impact is the commission revenue on the income statement when sales occur. This is a critical distinction — misclassifying consigned goods as owned inventory would overstate both assets and liabilities on the consignee's balance sheet.

Consignment Inventory and Inventory Valuation

Consignment inventory is subject to the same lower of cost or net realizable value (LCNRV) test as regular inventory. If the consigned goods become obsolete, damaged, or slow-moving while at the consignee's location, the consignor must record an inventory write-down. See our guide on journal entries for inventory write-down for the full treatment.

Regular physical counts and reconciliation with the consignee's sales reports are essential internal controls. The consignor should also review the aging of consigned inventory — goods that remain unsold for extended periods may indicate obsolescence risk. For a broader overview of inventory accounting, refer to our journal entries for inventory guide.

Key Takeaways

• The consignor retains ownership of consigned inventory until the goods are sold to an end customer — revenue is recognized only at that point, not at shipment.
• The consignor reclassifies inventory to a separate Consignment Inventory account on the balance sheet and recognizes the full selling price as revenue (gross reporting).
• The consignee makes no journal entry upon receiving consigned goods — the goods are not an asset or liability. Only memorandum tracking is maintained.
• The consignee records only the commission earned as revenue, not the full selling price. The consignee is an agent under ASC 606.
• Commission paid to the consignee is a selling expense for the consignor, included in operating expenses on the income statement.
• Consignment inventory must be tested for LCNRV impairment and reconciled regularly with the consignee's sales reports.