Consignment

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Consignment involves selling one's personal goods (clothing, furniture, etc.) through a third-party vendor such as a consignment store or online thrift store. 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 day limit before an item expires for sale (usually 60-90 days).

Contents

The consignment stock is stock legally owned by one party, but held by another, meaning that the risk and rewards regarding to the said stock remains with the first party while the second party is responsible for distribution or retail operations. [1] [2]

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 the agent for the purpose of sale. The 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: securitization, document) is a traditional legal and accounting technical term for logistics and business management and describes a special form of delivery of goods. [3]

Three conditions must be fulfilled to be consignment trade

1.) The supplier makes goods physically available to the sales agent in contracted quantities for trade or consumption.

  • It is a type of sales procedure where the risk lies with the supplier and allows the agent to concentrate on sales and does not need capital to cover the goods.
  • It is used by suppliers who lack their own sales resources.
  • By providing the customer with a stock, the supplier encourages consumption and sales.

2.) The sales agent always receives the payment from the third party (else it is another form of sales schemes)

  • The supplier is usually paid by the sales agent when the goods are sold and are paid for by the third parties.
  • The agreement typically, but not necessarily, includes a continuous replenishment of supplies for the sales inventories.

3.) Ownership is still with the supplier.

  • This means that the stock represents a form of credit from the supplier and a debt for the sales agent.
  • In legal disputes or bankruptcies, it is the supplier's and not the sales agent's property.

The procedure is traditional and still often practiced.

Some other cases are not 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.

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: [4]

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: [5]

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. [6]

See also

Related Research Articles

Pawnbroker Individual or business that offers loans, using personal property as collateral

A pawnbroker is an individual or business that offers secured loans to people, with items of personal property used as collateral. The items having been pawned to the broker are themselves called pledges or pawns, or simply the collateral. While many items can be pawned, pawnshops typically accept jewelry, musical instruments, home audio equipment, computers, video game systems, coins, gold, silver, televisions, cameras, power tools, firearms, and other relatively valuable items as collateral.

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.

Auction Process of offerings goods or services up for bid, and either selling to the highest bidder or buying from the lowest bidder

An auction is usually a process of buying and selling goods or services by offering them up for bid, 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.

Sales Activities related to the exchange of goods in a given time period

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.

Inventory 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.

In business or commerce, an order is a stated intention, either spoken or written, to engage in a commercial transaction for specific products or services. From a buyer's point of view it expresses the intention to buy and is called a purchase order. From a seller's point of view it expresses the intention to sell and is referred to as a sales order. When the purchase order of the buyer and the sales order of the seller agree, the orders become a contract between the buyer and seller.

Bait-and-switch is a form of fraud used in retail sales but also employed in other contexts. First, customers are "baited" by merchants' advertising products or services at a low price, but when customers visit the store, they discover that the advertised goods are not available, or the customers are pressured by salespeople to consider similar, but higher-priced items ("switching").

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.

A waybill (UIC) is a document issued by a carrier giving details and instructions relating to the shipment of a consignment of goods. Typically it will show the names of the consignor and consignee, the point of origin of the consignment, its destination, and route. Most freight forwarders and trucking companies use an in-house waybill called a house bill. These typically contain "conditions of contract of carriage" terms on the back of the form that cover limits to liability and other terms and conditions.

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 prices for products or services the seller had provided the buyer.

Letter of credit

A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, when the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter that assumes the counterparty risk of the buyer paying the seller for goods.

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.

Revenue recognition

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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.

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.

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.

In a supply chain, a vendor, 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.

International Commercial Law is a body of legal rules, conventions, treaties, domestic legislation and commercial customs or usages, that governs international commercial or business transactions. A transaction will qualify to be international if elements of more than one country are involved.

Consumer to consumer (C2C) markets provide an innovative 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).

References

  1. Valentini and Zavanella (2003). "The consignment stock of inventories: industrial case and performance analysis" (PDF). International Journal of Production Economics. Retrieved 17 August 2018.
  2. Battini; et al. (2010). "Consignment Stock Inventory Policy: Methodological Framework and Model". International Journal of Production Research. Retrieved 17 August 2018.
  3. "Consignment"  . Encyclopædia Britannica (11th ed.). 1911.
  4. "Codification of Staff Accounting Bulletins - Topic 13: Revenue Recognition". www.sec.gov. Retrieved 2016-03-03.
  5. "Consignment Arrangements | RevenueHub". RevenueHub. Retrieved 2016-03-03.
  6. "Determining the Transfer of Control | RevenueHub". RevenueHub. Retrieved 2016-03-03.

Further reading