Scenario Analysis No. 12 – Inventory “on consignment” and how to monitor its transactions?

In this business model, the source of items for sale are secured from another supplier, and to be sold by the business on a “consignment” basis.

The proposed steps in managing this issue, in my view, relate to four areas: Inventory of Goods on Consignment; Sales of Goods on Consignment; Remittance for Consignment Goods; and Consignment Goods Returned. The respective areas are described below.

INVENTORY OF GOODS ON CONSIGNMENT

The list of goods on consignment is created, with each item having its unique id code. If the items are numerous, then an excel spreadsheet list can be prepared for upload into the business system. The selling price of each item is pre-determined between the business and the supplier. Unless known, the cost price of each item is entered as zero.

The inventory balance for each of the item related to consignment goods will initially be zero. After file upload, the inventory balance is updated based on the items received and delivery notice from the supplier. An illustration of inventory balance update is as follows:

sample-inventory-balance-update

This inventory received transaction triggers an “InventoryIn” accounting entries which are as follows:

DR Inventory – Consignment           CR Supplier – Consignment Unbilled

SALES OF GOODS ON CONSIGNMENT

The sale of goods on consignment can be via Point-of-Sales transactions or the usual invoice-and-receipt customer transactions. Let’s say that the transaction is via POS. Illustration as per below:

sample-pos-transaction

Upon check-out, cash is received and receipt issued. The “InventoryOut” will be triggered, together with “Receipt” for the following accounting entries:

DR    Supplier – Consignment Unbilled     CR    Inventory – Consignment

DR    Cash – POS         CR    Sales – Items

Note that the balance in the “Supplier – Consignment Unbilled” account represents the quantity of items on consignment held by the business.

REMITTANCE FOR CONSIGNMENT GOODS

After the cash is collected, an “invoice received” is generated through the system. This is as if the supplier has issued the invoice for the items on consignment sold by the business. The invoice is to document the re-allocation of sales revenue under “Sales – Item” account to the “amount owed to the supplier” and the “commission earned”.

The accounting entries arising from the invoice issuance to reflect the re-allocation are is illustrated as follows:

sample-commission-earned

Finally, once the details are agreed, the remittance for the amount is transacted and payment is made to the supplier of the consigned goods. Note: The Sales Revenue recorded by the business is the “Commission Earned” and is represented by the difference in bank-in and bank-out amounts.

CONSIGNMENT GOODS RETURNED

Any unsold items on consignment returned to the supplier will trigger an “InventoryOut” process. The accounting entries are illustrated as below:

sample-zerorise-consignment

The inventory on consignment is returned and the balance under “Inventory – consignment goods” account is zerorised.

GNZ.

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