How to manage consignment stock

In a consignment arrangement, one business, often called the consignor, places goods with another, the consignee, which displays and sells them. The consignee doesn't buy the goods up front. When an item sells, the consignee keeps its agreed share and passes the rest to the consignor at the next settlement. Unsold goods can usually be returned.

Galleries, gift shops, secondhand stores and businesses trialling a new product can work this way. For the seller it means stock without paying first. For the supplier it means a way into a shop, with the risk that goods sit unsold or come back.

Either way, the goods sit with one business while belonging to the other until they sell. That gap is what the records have to cover.

business.gov.au suggests putting the terms agreed with a supplier in a written contract, so there is less room for argument about what each side must do. It lists terms such as the goods to be supplied, price and payment terms, timeframes, delivery terms, insurance responsibilities, dispute resolution and termination. For consignment, make sure the agreement also covers:

• who sets the selling price, and whether the seller can discount
• the seller's share of each sale, as a set amount per item or worked out another way
• how often settlement happens, and what the settlement statement shows
• who is responsible if goods are damaged, lost or stolen while with the seller
• how and when unsold goods are returned or collected.

business.gov.au suggests getting legal advice if you have trouble understanding contract terms.

Under the usual arrangement the goods aren't yours, so keep them in a separate consignment register rather than in your own stock list. Keeping them apart means the stock figure in your books describes only what the business owns. Confirm with your accountant how consignment arrangements should appear in your accounts.

1. When goods arrive, check them against the consignor's delivery note and record them in the register under that consignor, with a code that marks them as consignment stock.
2. Record each sale through your normal sales process, using the consignment code, so the sale can be traced to the consignor.
3. Keep track of what you owe each consignor as items sell, so the amount is known before settlement.
4. At each settlement date, prepare a statement for the consignor and pay the amount due.
5. Record returns of unsold goods to the consignor, signed for on collection.

For each item, opening stock plus units received should equal units sold, returned and still on hand, after any separately recorded losses or other movements. The example starts with no opening stock. Investigate any unexplained difference and check the agreement before deciding who bears a loss.

Under the usual arrangement, goods you place on consignment remain your stock until they sell. business.gov.au suggests sorting inventory records by location, such as warehouse or shop, and each seller holding your goods can be treated as one of your locations.

• Track goods sent to the seller as a move to that location rather than as a sale.
• Record a sale once the seller's statement shows the item sold, and ask your accountant how and when consignment sales should be recognised in your accounts.
• Check each settlement statement against opening stock, deliveries, returns and closing stock, allowing for any other documented movements, so only goods actually sold enter the settlement.
• Follow up a late statement or payment as you would any other amount owed to you.
• Count your goods at the seller's premises from time to time, or ask the seller to confirm what is on hand.

business.gov.au's guidance on getting paid suggests first checking your written agreement for the payment conditions if a settlement is late, then sending a friendly reminder.

At each stocktake, count consignment goods on their own sheet, by consignor, and compare the count with the consignment register rather than with your own stock records. business.gov.au describes a stocktake as checking whether what you have on hand matches your records, and that check works only when each set of goods is compared with its own records.

Keep the agreement, delivery and return notes, settlement statements and payment records together for each consignor or seller. business.gov.au says most business records need to be kept for 5 years. It also suggests keeping records of your communication with a supplier, which you may need if a dispute arises.