Consignment Inventory: How It Works (With a Worked Example)

Consignment inventory is stock that sits in one company's location but is still owned by another company until it sells. The supplier keeps ownership, the seller keeps the goods on hand, and money only changes hands when a unit actually moves. If you have ever walked into a boutique full of products the owner never paid for up front, you have seen consignment inventory in action.

This guide covers who owns what, how the money and accounting work, a worked example with real numbers, and the part that trips everyone up: tracking stock you hold but do not own (or own but do not hold).

What consignment inventory actually is

Two roles, one simple split:

• The consignor is the supplier or manufacturer. They own the goods.
• The consignee is the retailer, distributor, or customer. They hold the goods and sell them.

The trick is that possession and ownership come apart. The consignee has the product on their shelf, but it stays on the consignor's balance sheet until a sale happens. Only then does ownership transfer, the consignee owes the consignor for that unit (usually minus a commission), and revenue gets recognized.

Compare that to a normal purchase, where you buy stock, take ownership immediately, and carry the risk of it not selling. Consignment pushes that risk back onto the supplier.

Why anyone uses it

For the consignee (the seller):

• No cash tied up in inventory you have not sold yet.
• Low risk on new or unproven products. If it does not sell, you return it.
• You can carry a wider range without funding all of it.

For the consignor (the supplier):

• Shelf space and reach you would not get if the retailer had to buy up front.
• A way into cautious accounts that will not commit to a purchase order.
• Product in front of customers instead of sitting in your own warehouse.

The catch for the consignor is real. You are floating the inventory. Your cash is stuck in goods sitting in someone else's building, and you are trusting their count and their honesty. The catch for the consignee is smaller but not zero: you owe on every sale, your margin is a commission rather than a full markup, and you are on the hook for goods you do not own.

A worked example

Say you run a homewares shop and a local candle maker consigns 200 candles to you.

• Agreed retail price: $25 per candle.
• Consignment split: 60/40, you keep 40 percent.
• The maker keeps ownership until each candle sells.

In the first month you sell 120 candles.

Gross sales      = 120 x $25    = $3,000
Your commission  = $3,000 x 40% = $1,200
Owed to maker    = $3,000 x 60% = $1,800
Unsold on hand   = 200 - 120    = 80 candles (still the maker's)

You send the maker $1,800 and a statement, keep $1,200, and 80 candles stay on your shelf as the consignor's property. You never paid for those 80 up front, and if they never sell, you return them. That 80-unit figure is exactly what both sides argue about later if nobody is tracking it cleanly.

The accounting side, briefly

Where the goods sit on the books is the whole point:

• Consignor: keeps the goods in their own inventory (often in a "consignment inventory" or "inventory at customer" account). Recognizes revenue and cost of goods sold only when the consignee reports a sale.
• Consignee: does not record the goods as their own inventory at all. They track it as memo or off-balance-sheet stock and only book the commission earned plus the payable owed to the consignor.

Get this backwards and you either overstate your inventory (consignee booking goods they do not own) or understate it (consignor writing off stock that is still theirs). Both distort your numbers and both are common.

Consignment vs the alternatives

	Who owns shelf stock	Who carries the risk	When you pay
Traditional purchase	The buyer	The buyer	Up front, on the PO
Consignment inventory	The supplier	The supplier	Only when it sells
Vendor-managed inventory (VMI)	Usually the buyer	Shared	On agreed terms, often after use

Consignment and VMI get confused a lot. VMI is about who decides the replenishment (the vendor watches your stock and restocks it for you). Consignment is about who owns it. You can run VMI on consigned stock, but the two are answering different questions.

The hard part: tracking it

Consignment breaks the assumption baked into most inventory setups, which is that stock in your building is stock you own. Now you have four buckets to keep separate:

1. Stock you own and hold (normal).
2. Stock you own but hold at someone else's site (the consignor view).
3. Stock you hold but do not own (the consignee view).
4. What has sold, per partner, so settlement is correct.

A spreadsheet handles one candle maker. It falls apart at ten consignors across three store locations, each with their own split, each expecting an accurate monthly statement. The moment counts drift, trust goes with them, and consignment relationships run almost entirely on trust.

What you actually need:

• Ownership as an attribute of stock, not an assumption. Every unit tagged with who owns it.
• Location tracking, so "on hand" and "who holds it" are separate facts.
• Per-partner reporting, so each consignor gets a clean sold, unsold, and owed statement without you rebuilding it by hand.
• An audit trail and API access, so both sides reconcile against the same source of truth instead of arguing over two spreadsheets.

Where Inventoros fits

Inventoros is a free, open-source, self-hosted inventory system that tracks stock across multiple locations, so the "who holds it" versus "who owns it" split that consignment demands is something you can model directly instead of fighting your tools. It is MIT licensed and runs on your own server, which matters when the stock ledger is the exact thing you and your consignment partners are trusting. Its REST and GraphQL API plus webhooks let you push sale events and pull per-partner counts automatically, so settlement statements come from data instead of memory.

If you want to see how stock and locations are modeled before committing, the documentation walks through setup on cPanel, a VPS, or Docker.

FAQ

Who owns consignment inventory? The consignor (the supplier) owns it until it sells. The consignee holds the goods and sells them, but ownership only transfers at the point of sale, which is the same moment the consignee owes payment for that unit.

Is consignment inventory an asset on the consignee's books? No. It stays on the consignor's balance sheet as their inventory. The consignee tracks it as memo stock and only records the commission earned plus the amount owed once items actually sell.

What happens to unsold consignment stock? It goes back to the consignor, or the agreement rolls it into the next period. Because the consignee never bought it, they are not stuck with dead stock. Spell out the return terms and how long stock can sit in the consignment agreement up front.

How is consignment different from dropshipping? With consignment, the goods physically sit at the consignee's location before they sell. With dropshipping, the seller holds no stock at all and the supplier ships directly to the customer when an order comes in. Consignment is about ownership of on-hand stock. Dropshipping is about never holding stock.