Introduction
The terms “consignment” and “sale” are often used interchangeably in everyday language. However, in accounting and commerce, they have distinct meanings and legal implications. While both involve the transfer of goods, the ownership, risk, and accounting treatment differ significantly. This article explains the differences and clarifies why consignment is not the same as a sale.
Main Body
What is a Sale?
A sale is a transaction in which goods are transferred from the seller to the buyer for a price, and the ownership rights pass immediately upon sale. The buyer assumes all risks and rewards of ownership.
Key Features:
- Ownership of goods is transferred to the buyer.
- Buyer bears the risk after the sale.
- Recorded as revenue in the seller’s books immediately.
- Buyer can resell or use the goods freely.
What is a Consignment?
In a consignment, goods are sent by a consignor (owner) to a consignee (agent) for sale. The consignee sells the goods on behalf of the consignor and earns a commission. Ownership remains with the consignor until the goods are sold.
Key Features:
- Ownership does not pass to the consignee.
- Risk of loss remains with the consignor until the goods are sold.
- Consignee acts as an agent, not a buyer.
- Revenue is recognized by the consignor only when goods are sold.
Differences Between Consignment and Sale
| Basis | Consignment | Sale |
|---|---|---|
| Ownership | Remains with consignor | Transferred to buyer |
| Risk | Consignor bears the risk | Buyer bears the risk |
| Nature of Relationship | Principal-Agent | Buyer-Seller |
| Revenue Recognition | On actual sale by consignee | At the point of sale |
| Return of Goods | Unsold goods can be returned | Normally cannot be returned |
| Commission | Consignee earns commission | No commission involved |
Example
Consignment: A manufacturer sends garments to a retailer on consignment. The retailer sells them and remits the sale proceeds (after deducting commission) to the manufacturer. Unsold garments can be returned.
Sale: A retailer buys garments from a manufacturer. The ownership transfers immediately, and the retailer assumes the risk of selling them.
Conclusion
Consignment is not the same as a sale. In a consignment, the ownership and risk stay with the consignor until the actual sale takes place. The consignee acts as an agent and earns a commission, whereas in a sale, the transaction is complete once the goods are transferred, and the buyer assumes all risks and responsibilities. Understanding these differences is crucial for accurate accounting and legal compliance.