In this guide
Counting Stock You Do Not Own
Consignment stock separates two things that usually travel together: possession and title. The goods sit at the dealer's premises, but ownership stays with the manufacturer until a sale to the end customer takes place, and that is the moment revenue is recognised and stock leaves the manufacturer's books. So the manufacturer reports the stock even though it is nowhere near his warehouse, and the dealer must exclude it from his own inventory even though it is standing on his floor. Both parties need the count for different reasons. The manufacturer needs it because a material balance sheet item is in somebody else's custody. The dealer needs it because his own audited stock figure is only correct if consignment goods are properly identified and excluded. The count establishes what is physically present, what has been sold and not yet reported, and what is damaged or unsaleable and therefore still the consignor's problem.
How Consignment Arrangements Work
A consignment arrangement separates possession from ownership deliberately. The consignor delivers goods to the consignee's premises so they are available to sell, and title stays with the consignor until a sale to an end customer takes place. Delivery to the consignee is not a sale and triggers nothing: no revenue, no receivable, no transfer of risk in the ordinary sense. That single feature governs the accounting on both sides and it is the point most frequently misunderstood, because the goods have physically moved and everything about the situation looks like a supply. Consignor and consignee obligations follow from it. The consignor retains the risk of goods not selling and generally bears the risk of obsolescence, and reports the stock in its own inventory despite not holding it. The consignee holds the goods as a bailee, must keep them identifiable, must account for sales as they occur, and must exclude the stock from its own inventory entirely. Where the agreement is silent, the position is settled by conduct and correspondence rather than by assumption, which is a considerably weaker footing for both parties and is exactly where disputes about unsold and damaged goods arise.
The Double-Counting Risk
Consignment creates the one situation where the same physical goods can plausibly be claimed by two parties or by neither, and both errors are common. The same stock on two balance sheets happens where the consignee treats goods on the floor as its own inventory, because that is what the physical position suggests, while the consignor continues to report them as it should. Both sets of accounts are then overstated, and where both parties borrow against inventory two lenders are advancing against the same goods. The mirror error is the same stock on neither. The consignor removes the goods from inventory on despatch, treating delivery as a sale, while the consignee correctly excludes them, so the goods exist and appear nowhere. This understates the consignor's assets and typically accelerates revenue as well. How an auditor detects it is by working from the physical position outward rather than from the ledgers inward. Goods found at a location are traced to whoever claims them, the claim is tested against the agreement and the sales records, and confirmations are obtained from the counterparty. A count that establishes quantity without establishing title has not addressed the risk at all.
Verifying at the Consignee Premises
Counting goods on somebody else's floor introduces constraints that do not arise on the owner's own premises. Access and notice should come from the consignment agreement rather than from goodwill, and an agreement providing for verification on reasonable notice removes the negotiation entirely. Without it, a consignee has a straightforward basis for declining, and a balance that cannot be verified is reported as unverified rather than assumed correct. Segregation from the consignee's own stock is the first thing examined on arrival. Where the consignee also buys the same goods outright, physically identical items sit side by side under different ownership, and unless the consignment stock is separately located or marked, establishing which is which depends entirely on the consignee's records, which is the thing being tested. Marking and separate storage are worth requiring in the agreement for that reason. Reconciling to consignment statements is the final step. The statements the consignee files, showing opening stock, sales and closing stock, are compared against the count and against the consignor's despatch records, and a persistent gap between reported and verified closing stock is a reporting problem rather than a counting difference.
Evidence That Establishes Ownership
With consignment goods, establishing whose stock it is matters as much as establishing that it is there, and three documents do that work. The consignment agreement is the foundation, because ownership on these arrangements is a matter of what the parties agreed rather than of where the goods are standing. The agreement states when title passes, what the holder may do with the goods, who bears the risk of damage, and how unsold stock is returned. Where no written agreement exists, the arrangement is whatever the conduct and correspondence establish, which is a considerably weaker position for both sides. Confirmation from the counterparty is the second element: the holder confirming what is present and acknowledging that it belongs to the consignor, which is evidence the goods have not been treated as the holder's own. Third are the sales records tested against stock movement. Title passes on sale to the end customer, so the stock reduction and the sale report should correspond, and goods that have gone without a corresponding report are the recurring problem on these arrangements rather than goods that were never delivered.
Getting Consignment Stock Right
Fix the agreement terms while the relationship is comfortable rather than when a dispute has started. Four terms carry most of the weight: when title passes, how often the holder must report sales and stock, who bears the risk of damage while the goods are held, and whether the consignor may enter the premises to verify. That last one is the term people omit and then need. An arrangement without a written agreement is governed by whatever the conduct and correspondence establish, which is a weak position for both parties. Set a reconciliation frequency and hold to it. Monthly reporting of opening stock, sales and closing stock, reconciled against the consignor's dispatch records, keeps the balance current and makes any divergence small enough to investigate. Annual reconciliation on a moving population produces a difference nobody can explain. An independent count protects both sides, which is worth saying plainly: it confirms the consignor's asset and it discharges the holder's custody obligation, so neither party is relying on the other's records. Electronics stock audit work covers consignment locations within the same engagement.
