Your Companion in Understanding things Better - Vedantu
The producers are unable to reach everywhere to sell their produce. They reach their consumers through some middlemen like wholesalers or retailers. They also sign up with other channels for the distribution of their goods. The goods are also made available at different places through agents and agencies. Generally, a producer or a wholesaler appoints agents at different markets or in different parts of the country to sell goods on their behalf in return for the commission. This kind of arrangement is called Consignment.
Definition
The contract or an agreement of sending several goods by the producers or manufacturers of a place to their agents for the sale is known as a consignment.
The consignor is the person who sends the goods. Generally, producers or manufacturers are consignors. The person to whom the goods are sent for sale is known as the consignee. The consignor and the consignee share the relationship of a principal and an agent. The consignee operates entirely on behalf of the consignor. The consignee never becomes the owner of the goods. The consignor remains the owner of the goods. If in transit, the goods are destroyed due to unavoidable circumstances then the consignee is not responsible. The consignor has to bear the loss. The consignee sells the goods as per the instructions of the consignor. The consignee earns his commission or his expenses after the goods are sold at the market. It is to be noted that the consignee does not buy the goods, they just receive the possession of the goods on behalf of the consignor.
Types of Consignment
There are two types of consignment:
Outward consignment.
Inward consignment.
Outward Consignment
When goods are sent from one country to another for sale, the consignment is called outward consignment.
Inward Consignment
When the goods are sold domestically for sale then it is called inward consignment.
Consignment's objectives
By attracting customers, you will be making large consignments and increasing sales volume.
Launching a new product and creating or capturing the market for it.
Earning higher revenue for the same product in another geographic area.
This will lead to growth and expansion of business.
Securing a consolidated marketplace domestically and internationally.
Make use of the expertise and talent of the consignee to increase sales.
Consignment Processing
As part of the consignment, the consignor sends the goods to the consignor. As part of the consignment process, the consignee should separate items that will be sold from those that will not (usually damaged or dirty items that might not be able to be sold in some jurisdictions). Although the goods were not sold until they were sold to a buyer, they cannot be treated as a sale until they were sold. Predetermined terms are set for how revenue is distributed from the sales and the length of time goods are held for sale. If the goods are not sold within that period, the consignor reclaims those goods. However, if the period is extended according to the contract, that can be agreed to. In the end, the consignor is paid out of the sales proceeds less his commission and expenses by the consignee.
Importance of Consignment
Consignment helps the manufacturers and the producers to bring economies of large-scale production with increased sales. It generates high sales which result in production on a large scale and this leads to economies of scale as large-scale production results in a fall in cost per unit.
It is more beneficial for the manufacturers who have many units at different locations in their domestic country or other countries. As in such situations, the local agents have more knowledge of the markets at those places than the manufacturers. So, he generates more profitable sales by approaching local customers.
Due to long-distance, if a prospective buyer is not easily approachable by a producer then the agent plays an important role to establish contacts with them regularly and ensure delivery of goods on time.
Features of Consignment
Consignor sends the goods to the consignee or agent for sale at a profit.
The consignor is the principal whereas the consignee acts as an agent.
The consignee does not buy the goods from the consignee. He needs to give the sale earnings to the consignor after goods are sold and not otherwise.
The consignee is not liable for any loss or destruction of the goods but he is responsible to take reasonable care in protecting the goods.
The unsold goods belong to the consignor and not to the consignee. The latter has to return the unsold goods to the consignor.
Only the consignor is entitled to any profit or loss for the goods sold by the consignor. The consignee earns the only commission.
Sale
Sale is a mutual contract wherein the ownership of goods is transferred from the seller to the buyer for a price or compensation.
Features of a Sale
In order to compose a sale, the following elements are important:
Bargain or contract of sale.
Payment or promise of payment of the price.
Delivery of goods.
Transfer the ownership of goods.
Distinction Between Consignment and Sale
FAQs on Consignment vs. Sale: Key Distinctions
1. What is consignment in business, and who are the consignor and consignee?
A consignment is a business arrangement where one person sends goods to another person to be sold on their behalf. The person who owns and sends the goods is called the consignor. The person who receives the goods and sells them to customers is called the consignee, who acts as an agent for the consignor.
2. What is the main difference between a consignment and a sale?
The key difference lies in the transfer of ownership. In a sale, ownership and risk of the goods pass immediately from the seller to the buyer. In a consignment, the consignor retains ownership and risk until the consignee sells the goods to a final customer. The consignee only possesses the goods but does not own them.
3. Can you give an example of a consignment transaction?
A common example is an artist placing their paintings in a local art gallery. The artist is the consignor, and the gallery is the consignee. The gallery displays the paintings, but the artist still owns them. The gallery only pays the artist (after taking a commission) after a painting is sold to a customer. If the paintings don't sell, they are returned to the artist.
4. When goods are transferred, who bears the risk of loss or damage in a consignment versus a sale?
The party who owns the goods bears the risk.
- In a consignment, the consignor (the owner) bears all risks of loss or damage until the goods are sold.
- In a sale, the risk transfers immediately to the buyer as soon as the purchase is made.
5. Why is the transfer of ownership so important in distinguishing between a sale and consignment?
The transfer of ownership is crucial because it determines several key factors. It dictates who is responsible for any loss or damage to the goods, who can claim the goods in case of insolvency, and how the transaction is recorded for accounting purposes. Essentially, it defines the legal and financial relationship between the parties involved.
6. How does a consignment differ from a joint venture?
The primary difference is the relationship between the parties. A consignment is a principal-agent relationship where the consignee sells goods on behalf of the consignor for a commission. A joint venture is a business partnership where two or more parties pool resources and share ownership, profits, losses, and risks in a specific project.
7. In what situations would a business owner prefer using consignment over a direct sale?
A business owner might prefer consignment in several situations, such as:
- When entering a new market to test product demand without forcing retailers to buy inventory.
- For selling high-value or unique items, like art or custom furniture, where retailers are hesitant to take on the risk of unsold stock.
- To maintain control over the final selling price of the product.
8. How are unsold goods with the consignee treated in the consignor's accounting books?
Since the consignor still owns the unsold goods, they are not treated as a sale. At the end of the accounting period, these goods are included as part of the consignor's closing stock in their financial statements. They are valued at cost plus any proportionate non-recurring expenses incurred by the consignor or consignee.
