Goods left with market traders: keeping consignments in your records

1,200 metres of fabric have been left on a trader's stall at a wholesale market; payment is due as the goods sell. The fabric is no longer in the warehouse, yet it is still yours. The storekeeper wrote the issue slip, accounting has not yet issued the invoice, and the trader cannot quite remember how many metres he sold. Six months later nobody knows where this stock is or how much of it remains. Consignment goods are the riskiest kind of stock: outside the warehouse record, yet part of your inventory. This article shows how to keep them in your records.

Where consignment stock sits in the records

Ownership stays with you; the goods change hands only when the trader sells them. So consignment goods are neither "stock in the warehouse" nor "sold goods". Open a separate location or sub-warehouse for each trader, for example "Consignment, Trader A". In the management report, show "stock held by third parties" as its own line. If it is mixed into the warehouse total, a count always shows a shortage; if it is left out, management cannot see part of the stock. Value the goods at cost; keep the selling price list given to the trader separately and, when prices change, notify the new list in writing, because collection follows that list. Confirm document types and accounting treatment with your local accountant at the start.

Four documents

A consignment arrangement runs on four documents:

• dispatch slip: item code, lot, metres or pieces, date and the trader's signature of receipt;
• sales report: the trader reports in writing at fixed intervals, say every ten days, how much he has sold;
• return slip: goods coming back from the trader;
• payment record: the money received for goods sold.

The order matters. The dispatch slip is prepared before the goods leave the warehouse, and the trader receives a copy. The sales report should be obtained in writing before the count; otherwise it can be fitted to the count result.

The reconciliation formula and an example

The quantity that should remain with the trader is found as: sent − sold − returned. An illustrative case: 1,200 metres sent, a sales report of 780 metres and 150 metres returned. What should remain is 1,200 − 780 − 150 = 270 metres. If a count on site finds 240 metres, the difference is 30 metres, or 2.5 per cent of the quantity sent (30 ÷ 1,200).

The money side is checked separately. Let the unit cost be 3 USD and the selling price 4 USD. For the 780 metres sold, the amount to be collected is 780 × 4 = 3,120 USD; if the trader has paid 2,800 USD, the open balance is 3,120 − 2,800 = 320 USD. The missing 30 metres come to 30 × 3 = 90 USD at cost and 120 USD at selling price. So two different questions get two different answers: how many metres are missing, and how much money is outstanding?

Counting at the trader's premises

Make the count by appointment, and write the right to count into the consignment agreement. The trader's stall or store may also hold similar products from other suppliers; separate your goods by label, lot and brand mark. Sticking a label reading "consignment" and your company name on every roll or carton at dispatch makes both counting and showing ownership easier. Count together with the trader or his representative, write the result into a report signed by both sides and take photographs. Show opened, cut or used pieces on a separate line. Whatever the date of the count, the sales report and the count result should enter the same reconciliation table each time.

The main risks

• goods the trader has sold but not reported;
• mixing with another supplier's goods;
• cut ends and remnants that are not returned;
• late payment; the older the money for sold goods, the bigger the dispute;
• unlimited consignment; set a value ceiling per trader, for example 5,000 USD.

In short

Goods that are not in the warehouse are still part of the count and the report; consignment balances are followed on their own line, with regular reconciliation. StockSystem compares material at subcontractors and in production with the issue slips; where an off-site balance such as consignment goods at a market needs a visit, the scope is written separately in the quote.