Selling items before buying it.

Not having dealt with consignment sales, perhaps it might be wisest to have a liability account called Consignment Sales Receipts and when the item is sold you put the payment you received in there. When you get the bill, offset the cost of the item to the Consignment Sales liability account and any extra monies made over and above the cost could go into a Consigment Commission revenue account. Losses could go to a Consignment Sales Loss account.

This would seem to make sense to me. Anyone else have a better method?

Stephanie

On Thu, 24 Nov 2005 09:09:45 -0500, in alt.accounting "S.M.Serba" wrote in :

It depends on whether you do accrual or cash accounting.

For accrual, you would want to track the consignment goods from the moment they come in the door. As the goods come in, you would add to two accounts. Debit an asset account with a name like Consignment Goods (held for sale) and credit a liability account with a name like Consignment Liability (). On the sale, you would take the amount that the item cost you out of the Consignment Goods asset account and add it to the expense account and transfer the equivalent Consignment Liability to a payable account (AP or Consignment Sales Payable).

On cash, you recognize the expense at the time you pay for it. Under neither is the consignment counted in your inventory.

First of all, you really shouldn't have goods available for sale that have no value attached. Once those goods enter your store, you are liable for payment or return. How would you handle an insurance claim in the case of fire?

Just for the record, the goods may not have been legally yours, but they were your responsibility. This creates a liability.

I would create an inventory account with a corresponding liability on the day the items arrived. If the arrangement is such that you do not know what you WILL be invoiced, you'll need to derive a value. Ticket price less your commission percentage would be appropriate But if you know what you will be invoiced, then you already have a figure. If, in the previous case, you mark down an item in order to sell it, once you mark it down, adjust the inventory in a like percentage (assuming you have a percentage of whatever you can sell it for agreement). Marking down an item when you know what will be invoiced will simply decrease your profit and you will need to use a sales discount account.

To illustrate the percentage of whatever you can sell it for agreement, let's assume you receive the items in April. Your agreement with the Supplier is 80/20. You plan to offer this for sale for $1200.

Apr. 15 Consignment Inventory $960 Consignments Returnable $960 Items received. Since you plan to sell for $1200 and the agreement is

80/20, record the inventory at 80% of your ticket price. This also gives you a reasonable value for insurance purposes.

Jun. 15 Cash $ 600 COGS $ 480 Consignment Inventory $ 480 Commissions Revenue $ 600 You sell half the items

Oct. 15 Consignments Returnable $ 48 Consignment Inventory $ 48 You mark the remaining items down 10% to get rid of them.

Nov, 1 Cash $ 540 COGS $ 432 Consignment Inventory $ 432 Commissions Revenue $ 540 You sell the remaining items and give the supplier the information on the sales.

Dec. 15 Consignments Returnable $ 912 A/P $ 912 Supplier invoices you for half of the items at $480 and the other half at $432.

Bear in mind that this example simply shows entries that make sense in order to properly match income with expenses as well as to show the liability of return or payment you sustain by entering into an agreement. I named the account Consignments Returnable, but it could as easily be named Payable... just so long as it is understood that it is a liability. Furthermore, it is likely that you would be invoiced as the items are sold unless the agreement specifies otherwise.

Remember, just because you have yet to be invoiced does not mean what you sell has no value. If the value is unknown, you must use a reasonable method to give it a value.

Only difficulty here is the seller doesn't get the invoice for the consignment goods till AFTER the goods are sold...

Surely you would know the purchase price even if you haven't been invoiced. How can you set a selling price without knowing the purchase price?

Ken

On Thu, 24 Nov 2005 13:52:15 -0500, in alt.accounting "S.M.Serba" wrote in :

No problem. They know what the invoice amount will be.

Actually, consignment can be a funny thing when it comes to purchase price. We have a consignment shop in my town which operates for a month every quarter. People drop off items with a "suggested retail price" and the agreement is that they will receive a percentage of that if sold; however, the agreement also stipulates that if the item is not sold within the first three weeks, it may be discounted by 50% during the final week.

If they were entering transactions on a purchase by purchase basis, they would have to record the goods available for sale at the percentage promised and, then, reduce the remainder in the final week.

Oftentimes, c>Surely you would know the purchase price even if you haven't been invoiced.

Actually, consignment can be a funny thing when it comes to purchase price. We have a consignment shop in my town which operates for a month every quarter. People drop off items with a "suggested retail price" and the agreement is that they will receive a percentage of that if sold; however, the agreement also stipulates that if the item is not sold within the first three weeks, it may be discounted by 50% during the final week.

If they were entering transactions on a purchase by purchase basis, they would have to record the goods available for sale at the percentage promised and, then, reduce the remainder in the final week.

Oftentimes, consignment COGS is simply an agreed percentage of sale price (with bottom limits, I am sure). If haggling is allowed, one can't know the true COGS until the sale is final. Two entries would need to be made at the time of sale if a haggling were successful... one to write down the asset and the liability and another to record the sale.

On Thu, 24 Nov 2005 22:25:52 -0600, in alt.accounting Beverly wrote in :

The original problem discussed a supplier, not suppliers, so I felt confident doing it that way. For consignment shops, I would put each item into consignment inventory at expected COGS and make any adjustment at time of sale -- this will make folks like insurance companies happy in the event of a problem.

I think this is what I have been saying all along... record the asset with an unknown cost using a reasonable method (most reasonable is expected COGS) with a corresponding liability. Then, adjust the asset and liability when expected COGS changes... and it certainly would be solid at time of sale.

you can't sell something you don't have...book it as a deposit...that will make your life / books simpler...