Accounting for Consignment Sales:
Manhattan CPA
Terms:
Consignor: The owner of the item (e.g., painting) to be sold.
Consignee: The selling agent (e.g., gallery) who accepts from the consignor the item to be sold.
According to accepted accounting and tax practice “in consignment sales, the consignor [e.g., artist] uses a modified version of the sales basis of revenue recognition. That is, the consignor [artist] recognizes revenue only after receiving notification of sale and the cash remittance from the consignee. The consignor [artist] carries the merchandise as inventory throughout the consignment, separately classified as Merchandise on Consignment. The consignee [e.g., gallery] does not record the merchandise as an asset on its books. Upon sale of the merchandise, the consignee has a liability for the net amount due the consignor [artist]. The consignor [artist] periodically receives from the consignee a report called account sales that shows the merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash remitted. Revenue is then recognized by the consignor [artist].”
This deferred revenue recognition is in accord with the latest U.S. GAAP and international accepted accounting principles which state that revenue should not be recognized on consignment sales until performance has taken place. If a company receives goods on consignment, revenue should not be recognized until the goods are sold to a third party.
Example: An artist delivers a painting to a gallery on consignment. The painting cost the artist $3,600 to make. The artist incurs shipping costs of $3,750. The artist agrees to pay the gallery a 40% sales commission, plus half the advertising. The total advertising is $75,000.
Shipment of consigned merchandise
| Consignor (artist) | Consignee (gallery) | |||
| Inventory on consignment | 3,600 | No entry | ||
| Inventory on hand | 3,600 | No entry | ||
Payment of shipping by consignor
| Consignor (artist) | Consignee (gallery) | |||
| Inventory on consignment | 3,750 | No entry | ||
| Cash | 3,750 | No entry | ||
Payment of advertising by consignee – half charged to consignor
| Consignor (artist) | Consignee (gallery) | |||
| Advertising expense[1] | xxxx | xxxx | 37,500 | |
| Cash | xxxx | xxxx | 75,000 | |
| Payable to consignor (artist) | xxxx | xxxx | 37,500[2] | |
Sale of consigned merchandise – $500,000
| Consignor (artist) | Consignee (gallery) | |||
| Cash | No entry | 500,000 | ||
| Payable to consignor (artist) | No entry | 500,000 | ||
Notification of sales and expenses
| Consignor (artist) | Consignee (gallery) | |||
| Advertising expense | 37,500 | xxxx | xxxx | |
| Commission expense | 200,000 | xxxx | xxxx | |
| Commission revenue | xxxx | xxxx | 200,000 | |
| Consignment sales | 500,000 | xxxx | xxxx | |
| Receivable from consignee (gallery) | 262,500 | |||
| Payable to consignor (artist) | xxxxx | xxxxx | 200,000 | |
Payment of amount due
| Consignor (artist) | Consignee (gallery) | |||
| Cash | 262,500 | 262,500 | ||
| Payable to consignor (artist) | 262,500 | |||
| Receivable from consignee (gallery) | 262,500 | |||
From this example we see that the consignee (gallery) does not record sales. It records commission revenue, and then for the net amount, not the gross amount of the proceeds. An account for purchases and related cost of goods sold are not used.
[1] Or prepaid advertising, as appropriate.
[2] The consignor (artist) is charged for his half of the advertising costs.
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