Consignment inventory is stock held by one business for another under an agreement that determines when ownership or control changes and when payment becomes due. The supplier is the consignor; the business holding the stock is the consignee. A delivery does not necessarily create the same purchase obligation as an ordinary stock purchase.
Consignment and vendor-managed inventory answer different questions. Consignment concerns the commercial arrangement for the goods; VMI concerns who decides replenishment. Either can exist without the other.
Start with the agreement
Define which items belong in the arrangement, their locations and identifiers, the settlement trigger, pricing or commission, reporting frequency, returns, damage responsibility, insurance and how either party ends the arrangement. A right to return unsold goods, cancel a program or change prices must be agreed; it is not an automatic property of every consignment deal.
Record physical receipt even when the accounting treatment does not recognize an owned inventory asset or payable. Staff still need to know what is present, where it is and whose goods they are handling. Keep consigned and owned quantities distinguishable for counting, returns and replenishment.
The accounting owner should determine inventory ownership, revenue recognition and whether the consignee reports gross sales or a commission based on the contract and applicable accounting framework. A single universal journal entry would obscure those differences.
A settlement example
Assume a supplier places 20 identical items in a store. The agreement pays the supplier $30 per unit sold and requires monthly reconciliation. During the month the store sells 8, returns 2 with supplier acceptance, and counts 9 still present.
Expected physical quantity = 20 received − 8 sold − 2 returned = 10
Physical quantity = 9
Unexplained shortage = 1
Sales-based settlement = 8 × $30 = $240