Consignment

Last updated

Consignment is a process whereby a person gives permission to another party to take care of their property and retains full ownership of the property until the item is sold to the final buyer. [1] It is generally done during auctions, shipping, goods transfer, or putting something up for sale in a consignment store. [2] The owner of the goods pays the third-party a portion of the sale for facilitating the sale. Consignors maintain the rights to their property until the item is sold or abandoned. Many consignment shops and online consignment platforms have a set time limit (usually 60–90 days) at which an item's availability for sale expires. Within the time of contract, reductions of the price are common to promote the sale of the item, but vary by the type of item sold (depending largely on the price point, or whether or not the item can be considered a luxury item).

Contents

Consignment stock is stock legally owned by one party but held by another, meaning that the risk and rewards regarding the said stock remain with the first party while the second party is responsible for distribution or retail operations. [3] [4]

The verb consign means "to send", and therefore the noun consignment means "sending goods to another person". In the case of retail consignment or sales consignment (often just referred to as a "consignment"), goods are sent to an agent for the purpose of sale. Legal ownership of these goods remains with the sender. The agent sells the goods on behalf of the sender according to instructions. The sender of goods is known as the consignor , and the agent entrusted with the custody and care of the goods is known as the consignee .

Concept

Consignment (Latin: consignatio, meaning "securitization" or "document") is a traditional legal and accounting technical term for logistics and business management and describes a special form of delivery of goods. [5]

Generally, three conditions must be met for a good to be considered part of a consignment trade:

  1. The owner or supplier must make the good(s) physically available to the sales agent in contracted quantities for trade or consumption. Risk remains solely with the supplier, allowing the agent to concentrate on sales; the agent does not need capital to cover the goods. Such arrangements are typically used by suppliers who lack the time or resources necessary to effect the sale of the good(s). By providing the customer with a stock, the supplier encourages consumption and sales.
  2. The sales agent must receive some form of payment or compensation from the supplier for facilitating the sale. The supplier is usually paid by the sales agent only after the good is sold and has been paid for by the buyer. The agreement typically, though not necessarily, includes a continuous replenishment of supplies for the sales inventories.
  3. Until the good is purchased by the buyer, ownership of the good legally remains with the supplier, despite the sales agent having physical custody of the good. This means that the stock represents a form of credit from the supplier and a debt for the sales agent. The sales agent is contractually obligated to repay the value of this debt, minus the fee for facilitating the sale, to the supplier when the stock is finally sold. In legal disputes or bankruptcies, the good is the supplier's and not the sales agent's property.

Examples

The consignment scheme is traditional and still often practiced across the world in many different forms:

Examples not considered consignment trade

.The traditional form of shipping business, where a captain sells and buys on consignment schemes on behalf of another party in a distant port from another nation, is generally no longer possible, due to customs and VAT regulations.

International consignment trade decline has affected everyday language expressions.

Internationally, this previously common form of international consignment trade is now quite rare. This is because there are major legal, tax-related, and accounting difficulties in conducting cross-border consignment trade. Modern uses of consignment are typically domestic.

In law and accounting, the expression is still very precise.

In business law and accounting, the concept of consignment trade has particular meaning.

It is important for the lawyer and the bookkeeper to have a clear idea of what consignment trade is, in order to be able to report it correctly, and assert the parties' rights and obligations, even if the concept of consignment trade is not specified in the agreements.

The legal conditions of consignment trade have been clear since ancient times.

Consignment in inventory control

Consignment inventory is a stock control model whereby the retailer sells the goods but the ownership remains with the supplier only till the products are sold. The retailer therefore only pays for the products he has sold and he is not required to purchase the goods. Beforehand, the two parties may have sign a consignment agreement with the terms like how long will the unsold goods take before being returned. [6]

Features

A consignor who consigns goods to a consignee transfers only possession, not ownership, of the goods to the consignee. The consignor retains title to the goods. The consignee takes possession of the goods subject to a trust. If the consignee converts the goods to a use not contemplated in the consignment agreement, such as by selling them and keeping the proceeds of the sale for the consignee, the crime of conversion has been committed.

The word consignment comes from the French consigner, meaning "to hand over or transmit", originally from the Latin consignor "to affix a seal", as it was done with official documents just before being sent.

  1. in return for the service of consignee, commission is paid to him by Consignor

Second-hand shops

"Consignment shop" is an American term for shops, usually second-hand, that sell used goods for owners (consignors), typically at a lower cost than new goods. Not all second-hand shops are consignment shops, and not all consignment shops are second-hand shops. In consignment shops, it is usually understood that the consignee (the seller) pays the consignor (the person who owns the item) a portion of the proceeds from the sale. Payment is not made until and unless the item sells. Such shops are found around the world. They can be chain stores, like the Buffalo Exchange or individual boutique stores. The consignor retains title to the item and can end the arrangement at any time by requesting its return. A specified time is commonly arranged after which if the item does not sell, the owner is expected to reclaim it (if it is not reclaimed within a specified period, the seller can dispose of the item at discretion).

Merchandise often sold through consignment shops includes antiques, athletic equipment, automobiles, books, clothing (especially children's, maternity, and wedding clothing, which are often not worn out), furniture, firearms, music, musical instruments, tools, paragliders and toys. eBay, drop-off stores and online sellers often use the consignment model of selling. Art galleries, as well, often operate as consignees of the artist.

The consignment process can be further facilitated by the use of vendor managed inventory (VMI) and customer managed inventory (CMI) applications. VMI is a business model that allows the vendor in a vendor-customer relationship to plan and control inventory for the customer, and CMI allows the customer in the relationship to have control of inventory.

Consignment shops differ from charity or thrift shops in which the original owners surrender both physical possession and legal title to the item as a charitable donation, and the seller retains all proceeds from the sale. They also differ from pawn shops in which the original owner can surrender physical possession (but not legal title) of the item in exchange for a loan and then reclaim the item upon repayment of the loan with interest (or else surrender legal title to the item), or alternatively can surrender both physical possession and legal title for an immediate payment; the pawn shop would retain all proceeds from any subsequent sale.

In the UK, the term "consignment" is not used, and consignment shops that sell women's clothing are called "dress agencies". Although the other types of consignment shop exist, there is no general term for them.

Procedure

A consignor brings their second-hand items in to be reviewed.

After the review, the consignee will return those items deemed unsuitable for resale to the consignor (such as torn or dirty items or items deemed to be fakes, which cannot be sold in some jurisdictions), accept those to be resold, and establish the target resale price, the consignee's share of it, and the length of time the items will be held for sale.

When a consignor's items sell (or in some cases, after the agreed-upon period ends), the consignee takes a share of the profits and pays the consignor the share. Items that are not sold are returned to the consignor (who must retrieve them within a set time or forfeit title to them; in some cases, the consignor may agree ahead of time to allow the consignee to donate them to charity).

Accounting

When a vendor (consignor) provides goods on consignment to a distributor (consignee) then revenue cannot be recognized when control has transferred. This could occur at the expiration of a specified consignment period, or the sale of an item to an end-consumer. The SEC has provided examples of consignment arrangements in question 2 of SAB Topic 13.A.2 including the following: [7]

Accounting Standards Codification (ASC) 606-10-55-80 (implemented for public companies December 15, 2017) provides three indicators of the presence of consignment arrangement that provides the principles behind the examples that the SEC has outlined. These indicators are as follows: [8]

This list of indicators of a consignment arrangement is not all-inclusive, so companies should also consider other indicators of the transfer of control found in ASC 606-10-25-30. [9]

See also

Related Research Articles

Trade credit is the loan extended by one trader to another when the goods and services are bought on credit. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organizations as a source of short-term financing. It is granted to those customers who have a reasonable amount of financial standing and goodwill.

<span class="mw-page-title-main">Auction</span> Process of offering goods or services up for bids

An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition exist and are described in the section about different types. The branch of economic theory dealing with auction types and participants' behavior in auctions is called auction theory.

<span class="mw-page-title-main">Sales</span> Activities related to the exchange of goods

Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. A period during which goods are sold for a reduced price may also be referred to as a "sale".

<span class="mw-page-title-main">Inventory</span> Goods held for resale

Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.

Caveat emptor is Latin for "Let the buyer beware". It has become a proverb in English. Generally, caveat emptor is the contract law principle that controls the sale of real property after the date of closing, but may also apply to sales of other goods. The phrase caveat emptor and its use as a disclaimer of warranties arises from the fact that buyers typically have less information than the seller about the good or service they are purchasing. This quality of the situation is known as 'information asymmetry'. Defects in the good or service may be hidden from the buyer, and only known to the seller.

Vendor-managed inventory (VMI) is an inventory management practice in which a supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a distributor.

An invoice, bill or tab is a commercial document issued by a seller to a buyer relating to a sale transaction and indicating the products, quantities, and agreed-upon prices for products or services the seller had provided the buyer.

A bulk sale, sometimes called a bulk transfer, is when a business sells all or nearly all of its inventory to a single buyer and such a sale is not part of the ordinary course of business. This type of action is often used in an attempt to dodge creditors who intend to seize such business's inventory; in order to protect the purchaser from claims made by creditors of the seller, the seller must usually complete an affidavit outlining its secured and unsecured creditors, which must usually be filed with a government department, such as a court office. Such procedures are outlined in the bulk sales act of most jurisdictions. If the buyer does not complete the registration process for a bulk sale, creditors of the seller may obtain a declaration that the sale was invalid against the creditors and the creditors may take possession of the goods or obtain judgment for any proceeds the buyer received from a subsequent sale.

<span class="mw-page-title-main">Revenue recognition</span>

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned, no matter when cash is received. In cash accounting—in contrast—revenues are recognized when cash is received no matter when goods or services are sold.

Amazon Marketplace is an e-commerce platform owned and operated by Amazon that enables third-party sellers to sell new or used products directly to consumers on a fixed-price online marketplace alongside Amazon's regular offerings. Using Amazon Marketplace, third-party sellers gain access to Amazon's customer base, and Amazon expands the offerings on its site without having to invest in additional inventory.

Scan-based trading (SBT) is the process where suppliers maintain ownership of inventory within retailers' warehouses or stores until items are scanned at the point of sale. Suppliers, such as manufacturers or farmers, own the product until it is purchased by the customer, with the store or venue then buying the product from the supplier and reselling it to the customer. Analysts in the grocery sector estimate scan-based trading accounted for $21 billion dollars in consumer goods purchased in the grocery industry alone in 2020, or nearly 3% of overall sales.

<span class="mw-page-title-main">Closeout (sale)</span>

A closeout or clearance sale is a discount sale of inventory either by retail or wholesale. It may be that a product is not selling well, or that the retailer is closing because of relocation, a fire, over-ordering, or especially because of bankruptcy. In the latter case, it is usually known as a going-out-of-business sale or liquidation sale, and is part of the process of liquidation. A hail sale is a closeout at a car dealership after hail damage.

An air waybill (AWB) or air consignment note is a receipt issued by an international airline for goods and an evidence of the contract of carriage. It is not a document of title to the goods. The air waybill is non-negotiable.

Field inventory management, commonly known as inventory management, is the task of understanding the stock mix of a company and the handling of the different demands placed on that stock. The demands are influenced by both external and internal factors and are balanced by the creation of purchase order requests to keep supplies at a reasonable or prescribed level. Inventory management is important for every other business enterprise.

Sale of Goods Acts regulate the sale of goods in several legal jurisdictions including Malaysia, New Zealand, the United Kingdom and the common law provinces of Canada.

A marketing channel consists of the people, organizations, and activities necessary to transfer the ownership of goods from the point of production to the point of consumption. It is the way products get to the end-user, the consumer; and is also known as a distribution channel. A marketing channel is a useful tool for management, and is crucial to creating an effective and well-planned marketing strategy.

<span class="mw-page-title-main">Vendor</span> Supplier of goods or services

In a supply chain, a vendor, supplier, provider or a seller, is an enterprise that contributes goods or services. Generally, a supply chain vendor manufactures inventory/stock items and sells them to the next link in the chain. Today, these terms refer to a supplier of any goods or service.

<span class="mw-page-title-main">Special journals</span> Specialized lists of financial transaction records

Special journals are specialized lists of financial transaction records which accountants call journal entries. In contrast to a general journal, each special journal records transactions of a specific type, such as sales or purchases. For example, when a company purchases merchandise from a vendor, and then in turn sells the merchandise to a customer, the purchase is recorded in one journal and the sale is recorded in another.

Customer to customer markets provide a way to allow customers to interact with each other. Traditional markets require business to customer relationships, in which a customer goes to the business in order to purchase a product or service. In customer to customer markets, the business facilitates an environment where customers can sell goods or services to each other. Other types of markets include business to business (B2B) and business to customer (B2C).

A consignment agreement is an agreement between a consignee and consignor for the storage, transfer, sale or resale and use of the commodity. The consignee may take goods from the consignment stock for use or resale subject to payment to the consignor agreeably to the terms bargained in the consignment agreement. The unsold goods will normally be returned by the consignee to the consignor.

References

  1. "CONSIGNMENT Definition & Legal Meaning". Black's Law Dictionary (2nd ed.). Retrieved March 10, 2023.
  2. "Consignor vs. Consignee". Archived from the original on 8 January 2023. Retrieved 8 January 2023.
  3. Valentini and Zavanella (2003). "The consignment stock of inventories: industrial case and performance analysis" (PDF). International Journal of Production Economics. Retrieved 17 August 2018.
  4. Battini; et al. (2010). "Consignment Stock Inventory Policy: Methodological Framework and Model". International Journal of Production Research. Retrieved 17 August 2018.
  5. "Consignment"  . Encyclopædia Britannica (11th ed.). 1911.
  6. Chuan Yang, Foo (October 9, 2022). "Practical Techniques to Control Warehouse Inventory". SIPMM Publications. Retrieved 2022-10-11.
  7. "Codification of Staff Accounting Bulletins - Topic 13: Revenue Recognition". U.S. Securities and Exchange Commission. Retrieved 2016-03-03.
  8. Nielson, Clark; Budd, Cassy (August 17, 2015). "Consignment Arrangements". RevenueHub. Archived from the original on Mar 17, 2016. Retrieved 2016-03-03.
  9. Riley, Brett (August 17, 2015). "Determining the Transfer of Control". RevenueHub. Archived from the original on 2016-03-06. Retrieved 2016-03-03.

Further reading