Yes, consignment goods are included in inventory, but only on the consignor’s books. The party that still owns the merchandise reports it as an asset; the party holding it for sale does not. The IRS states the rule plainly: goods out on consignment stay in the owner’s inventory, and goods consigned to a seller are excluded from that seller’s inventory.1Internal Revenue Service. Publication 538 – Accounting Periods and Methods Physical location does not decide the question. Legal title does.
The reason is simple. In a consignment, the consignor ships goods to a consignee to sell on the consignor’s behalf, but never transfers ownership until a third-party customer actually buys the item. The consignee holds the merchandise as a sales agent. If nothing sells, the consignor can call the goods back or move them to a different seller, and the consignee owes nothing for the unsold stock. The party carrying the economic risk of ownership is the party that carries the asset.
How to Tell an Arrangement Really Is a Consignment
Contracts sometimes use the word “consignment” loosely, and other arrangements function as consignments without the label. Under ASC 606, three indicators point to a consignment rather than a completed sale:
- The supplier controls the product until a specified event, such as a sale to an end customer, or until a set period expires.
- The supplier can require the goods to be returned or transferred to a different seller.
- The holder of the goods has no unconditional obligation to pay for them, though a deposit may be required.
If those indicators are present, the arrangement is a consignment regardless of how the contract is titled.2Financial Accounting Standards Board. ASU 2014-09 Revenue From Contracts With Customers (Topic 606) Misclassifying the arrangement has real consequences on both sides. Treating a consignment shipment as a sale accelerates revenue and pulls an asset off the balance sheet too early. Treating consigned goods as purchased inventory overstates both assets and liabilities.
What the Consignor Records
The consignor counts consigned goods in inventory and reports them as an asset on the balance sheet, even though the merchandise physically sits in a store or warehouse the consignor does not control. Under GAAP, control has not transferred, so the asset has not left.2Financial Accounting Standards Board. ASU 2014-09 Revenue From Contracts With Customers (Topic 606) The IRS aligns with the same principle for tax inventory.1Internal Revenue Service. Publication 538 – Accounting Periods and Methods
Most consignors track this stock in a separate account, often called “Inventory on Consignment,” to keep goods on their own premises distinct from goods held by others. That separation matters at period end, especially when merchandise is scattered across many consignee locations. A common error is simply leaving those remote goods out of the count. If ending inventory is understated, cost of goods sold is overstated, net income drops below its real figure, and total assets on the balance sheet are understated too. All of that reads as a material misstatement in an audit.
The carrying value of consigned inventory includes the purchase or manufacturing cost plus the costs of getting the goods to the consignee’s location. Shipping the consignor pays to deliver merchandise to the consignee is capitalized into inventory rather than expensed on the way out the door.
What the Consignee Records
The consignee excludes consigned goods from inventory entirely. The IRS is direct: goods consigned to you are not part of your inventory.1Internal Revenue Service. Publication 538 – Accounting Periods and Methods Reporting them would overstate the consignee’s assets, since the consignee has no ownership rights and no inventory risk beyond ordinary care.
Consignees typically track the merchandise through memorandum records or off-balance-sheet logs. Those records exist for internal control: knowing what is on the floor, what has sold, and what is owed back to the consignor. They never touch the general ledger and never appear in the financial statements.
The only ledger entries the consignee makes tied to consignment goods come from actual sales. When the consignee sells an item, it records a payable to the consignor for the proceeds (net of the agreed commission) and books the commission as its own income. Storage, display, and similar costs the consignee incurs while holding the goods are the consignee’s operating expenses.
When Revenue Gets Recognized
Neither party recognizes revenue when goods ship to the consignee. This is where consignment accounting departs most visibly from a standard wholesale sale. In a normal wholesale transaction, the supplier books revenue at shipment or delivery. In a consignment, shipping to the consignee is not a revenue event for anyone.
Under ASC 606, the consignor recognizes revenue when control of the goods transfers to the end customer, which happens at the final sale, not when the goods leave the consignor’s dock.2Financial Accounting Standards Board. ASU 2014-09 Revenue From Contracts With Customers (Topic 606) At that point, the consignor records the full sales price as revenue and moves the capitalized cost out of inventory and into cost of goods sold. The consignee records commission income at the same moment. The consignor either treats the commission as a selling expense or nets it against gross revenue when settling with the consignee.
Tax Reporting and Fixing Past Errors
Federal tax rules follow the same ownership principle as GAAP. Taxpayers must include goods they own, including goods out on consignment, and exclude goods consigned to them.1Internal Revenue Service. Publication 538 – Accounting Periods and Methods The general rule is that inventories must be kept whenever the production, purchase, or sale of merchandise is an income-producing factor, and the method used must conform to best accounting practices and clearly reflect income.3Office of the Law Revision Counsel. 26 U.S. Code 471 – General Rule for Inventories
Small businesses that meet the IRS gross receipts test can opt out of traditional inventory accounting and treat inventory as non-incidental materials and supplies or follow the method used in their financial statements.1Internal Revenue Service. Publication 538 – Accounting Periods and Methods The ownership question does not go away under that simpler approach. Goods you own still flow through your cost of goods sold no matter where they physically sit.
A business that has been treating consignment inventory the wrong way, whether as a consignee that included goods it did not own or a consignor that left out goods sitting at consignee locations, generally cannot just quietly change the number this year. When an incorrect treatment has been applied consistently, correcting it is a change in accounting method, and the taxpayer files IRS Form 3115 to request the change.4Internal Revenue Service. Instructions for Form 3115 Many inventory-related changes qualify for automatic consent, so there is no user fee and the filing process is streamlined. The adjustment triggered by the method change is typically spread over several years rather than absorbed in a single tax year.
A Warning About the Consignee’s Creditors
Carrying consigned goods on the consignor’s books does not by itself protect them from the consignee’s lenders. Under the Uniform Commercial Code, goods delivered for resale to a business that sells goods of that kind can be reached by the consignee’s creditors unless the consignor takes protective steps.5Legal Information Institute. UCC 2-326 Sale on Approval and Sale or Return; Consignment Sales
To keep the inventory out of a creditor’s reach if the consignee fails, the consignor generally needs to perfect a security interest under UCC Article 9 before the consignee takes possession of the goods. That means filing a UCC-1 financing statement in the appropriate jurisdiction and sending written notice to any existing secured creditor that has already filed against the consignee’s inventory, describing the goods the consignor is placing. These requirements mirror the priority rules for purchase-money security interests in inventory.6Legal Information Institute. UCC 9-324 Priority of Purchase-Money Security Interests
A consignor who skips those steps and later faces a consignee bankruptcy typically ends up as a low-priority general unsecured creditor, standing behind the consignee’s bank. Recovery in that position is often pennies on the dollar. Filing fees for a UCC-1 usually run between $5 and $40 depending on the state, which is easy to weigh against the size of the shipment at risk.