Consignment Stock
Consignment stock is inventory placed at another party's premises for sale, where legal title stays with the supplier until a sale to an end customer takes place. The party holding the goods has possession without ownership, so it excludes them from its own inventory, while the supplier continues to report them despite not holding them.
What Is Consignment Stock?
The arrangement creates the one situation where physical possession and legal ownership point at different businesses, which is why it produces more accounting errors than almost any other stock position. Delivery to the party who will sell the goods triggers nothing at all: no revenue, no receivable, no transfer of risk in the ordinary sense. Everything waits for the sale to the end customer.
Two mirror-image mistakes follow from that. The goods can end up on two balance sheets, where the party holding them treats them as bought because that is what the floor suggests, while the supplier correctly continues to report them. Or they can appear on neither, where the supplier books a sale on despatch and the holder properly excludes them. The first can lead to two lenders advancing against identical goods. Detection works from the physical position outward: goods are traced to whoever claims them, and the claim is tested against the written arrangement and the sales records rather than accepted.
Who Owns the Stock Under Consignment Stock
Ownership stays with the supplier right up to the point a final buyer purchases, whatever the physical position suggests.
- Whoever has the goods on their floor holds them in trust and owns nothing, so the stock stays off its balance sheet however long it has been on the premises.
- Reporting stays with the supplier, who also shoulders the risk of the goods never finding a buyer, which is the commercial substance of the arrangement.
- The evidence is the written agreement, and where none exists the position falls to be inferred from conduct and correspondence, which is a considerably weaker footing for both sides.
- The risk this creates is double counting: identical goods appearing in two sets of accounts, or vanishing from both where despatch is wrongly treated as the sale.
- A lender advancing against either party's inventory needs the arrangement identified before it relies on the figure.
How Consignment Stock Works in Practice
- A written arrangement is agreed setting out when title passes, how often sales must be reported, who bears the risk of damage, and whether the owner may enter the premises to verify.
- Goods are delivered to the holder against a document that is not an invoice, because no sale has occurred and nothing is yet owed.
- The holder stores them separately or marks them, keeps them out of its own inventory, and records them in memorandum form as goods held for another party.
- Ownership moves at the instant the goods are sold on to a final buyer. The holder reports the sale, the owner recognises revenue and removes the goods from its own stock, and an invoice follows.
- Periodically the position is reconciled: goods delivered, less sales reported, less damages agreed, should equal goods still held, and a physical count at the holder's premises tests that arithmetic.
Consignment Stock: A Worked Example
| Location | Value | Owner | Counted by the auditor? | In the borrower's stock? |
|---|---|---|---|---|
| Own godown, own goods | Rs 2,80,00,000 | Borrower | Yes | Yes |
| Own godown, held for a principal | Rs 74,00,000 | Principal | Yes, separately | No |
| At a dealer, unsold | Rs 52,00,000 | Borrower | Yes, by confirmation | Yes |
| At a dealer, sold not settled | Rs 16,00,000 | Dealer's customer | No | No |
A Ghaziabad appliance brand places stock with dealers and also stores goods for a principal.
The two middle rows move in opposite directions and are frequently confused. Goods sitting in the borrower's own godown are not automatically the borrower's: Rs 74 lakh belongs to a principal and must be counted, tagged and then excluded. Goods sitting at a dealer's premises may well be the borrower's, because title has not passed until the dealer sells. Ownership follows the agreement, not the address. A drawing power calculation built from a physical count at the borrower's premises alone would overstate by Rs 74 lakh and understate by Rs 52 lakh at the same time.
Common Mistakes With Consignment Stock
Possession and title point at different parties, and almost every error follows from forgetting that.
- The holder treating the goods as bought because they are physically present, so the identical goods appear in two sets of accounts and two lenders may each advance money against them.
- The supplier booking a sale on despatch, which recognises revenue early and leaves the goods on neither set of books.
- Operating without a written arrangement, so when goods are unsold or damaged the position rests on conduct and correspondence.
- Storing the goods mixed with the holder's own identical stock, which makes any count depend on the very records being tested.
- Reporting sales to the supplier late or not at all, which is the recurring failure on these arrangements rather than goods never delivered.
Need Help With Consignment Stock?
A definition describes; it does not verify. Once stock at somebody else's premises has to be counted and attributed, somebody has to attend, count and reconcile, which is the work behind auditing high-value electronics stock. The starting point is a list of locations and the records as they currently stand.