Differentiate between consignor and consignee

In accounting, consignor and consignee refer to the two parties involved in a consignment arrangement. A consignment arrangement is a type of business agreement where goods are sent by their owner (the consignor) to another party (the consignee) who agrees to sell the goods on behalf of the owner. Here are the key differences between the consignor and the consignee:

Consignor:

1. Definition: The consignor is the owner of the goods who sends them to the consignee for sale.
2. Ownership: Retains ownership of the goods until they are sold by the consignee.
3. Revenue Recognition: Recognizes revenue only when the consignee sells the goods to a third party.
4. Accounting Treatment: Records the consigned goods as inventory on their balance sheet until the goods are sold. Upon sale, the consignor records the revenue and the cost of goods sold.
5. Responsibility: Responsible for the costs of shipping the goods to the consignee and may also cover insurance and other related costs until the goods are sold.
6. Risks and Rewards: Bears the risks and rewards associated with the ownership of the goods until they are sold.

Consignee:

1. Definition: The consignee is the party who receives the goods from the consignor and agrees to sell them on the consignor’s behalf.
2. Ownership: Does not own the goods; acts as an agent or intermediary in selling the goods.
3. Revenue Recognition: Recognizes commission or a fee for the service provided, rather than recognizing the sale of the goods.
4. Accounting Treatment: Does not record the consigned goods as inventory on their balance sheet. Records a liability for the proceeds from the sale that are owed to the consignor.
5. Responsibility: Responsible for storing, displaying, and selling the goods. May also be responsible for keeping the consignor informed about the status of the inventory and sales.
6. Risks and Rewards: Does not bear the risks and rewards associated with the ownership of the goods; these remain with the consignor until the goods are sold.

Example:

Imagine a furniture manufacturer (consignor) sends a shipment of furniture to a retail store (consignee) to be sold. The manufacturer retains ownership of the furniture until it is sold by the retail store. The retail store does not record the furniture as inventory but will earn a commission on each piece of furniture sold. When the furniture is sold, the manufacturer records the sale revenue and the cost of goods sold, and the retail store records the commission income.

Summary:

• Consignor: Owner of the goods, retains ownership, recognizes revenue upon sale, records goods as inventory.
• Consignee: Sells the goods on behalf of the consignor, does not own the goods, recognizes commission income, does not record goods as inventory.

Understanding the distinction between consignor and consignee is crucial for proper accounting treatment and accurate financial reporting in consignment transactions.