The allocation is the act of delivering to another person or agent custody of any material or product, while retaining legal ownership of it until it is sold. Therefore, it is an arrangement in which the products are left in the possession of another entity to sell them.
This can be done for the purpose of dispatching products with third-party transportation, transferring products for auction, or placing products in a consignment store to try and sell them.
The agent sells the products on behalf of the sender according to the instructions indicated. Whoever ships the products is known as the “consignor” and the agent in charge of the custody and care of the products is known as the “consignee”.
Commonly, the consignor receives a percentage of the proceeds from the sale, depending on what has been agreed upon in the agreement.
The word consignment comes from the French consigner , which means "to deliver or deposit", originally derived from the Latin consignor or "to stamp a seal", as was done with official documents just before being sent.
Goods on consignment
They are the goods that legally belong to one of the parties, but that are stored by the other party, which means that the risk and benefits with respect to said goods remain with the consignor, while the consignee is responsible for the distribution or retail operation.
Ownership of consignment merchandise only transfers when the merchandise is used (dispatched or sold in the case of a store). Goods not used in a warehouse can be returned to the supplier for standard manufactured goods.
With customer-specific items, agreements regarding product return must be negotiated.
The consignor has the duty to pay all expenses related to the shipment. On the other hand, the consignee is not responsible for the damage of the products during the transport or for any other procedure carried out in the shipment.
A consignor who ships products to a consignee transfers only possession, not ownership of the products to them. The consignor retains ownership of the products.
Since ownership of consignment goods is not transferred until use, billing is not immediate.
Accounting management
To account for consignment replenishment at the customer site, the manufacturer must credit inventory and debit the customer's consignment.
Only after the customer actually uses the consignment merchandise can the account receivable be created.
Consignment sales
In the case of consignment sales (often referred to simply as consignment), the products are sent to the agent for the purpose of selling them. Ownership of these products remains with the sender.
The relationship between the two parties is that of consignor and consignee, not that of seller and buyer.
The products are sold at the risk of the consignor, therefore the profits or losses generated belong solely to the consignor. The consignee takes possession of the products subject to fiduciary ownership.
Selling on consignment is a great option for a person or company that does not have a physical presence in the market, although there may also be consignment agreements in cyberspace.
To some extent, online companies like eBay are consignment stores. For a percentage of the sale, they offer people a market to display and sell their products.
Consignment agreements are usually in effect for a specified period of time. After this time, if a sale is not made, the products are returned to their owner. Alternatively, the consignment period can be extended by mutual agreement.
Advantage
The advantages of the consignment model for the business owner are:
- You do not need to prepay for inventory to be sold, as most retail stores do.
- Any product that is not sold can be returned to the consignor or disposed of.
- You can build a solid clientele that regularly returns to look for products that are continuously changing.
- Payments can be made days or weeks after the item is sold, thus improving cash flow.
The advantages for the consignor or seller are:
- Sellers who don't have the time to promote their product for sale, conduct price research, or endure the chores associated with selling an item often find that consignment fees are a small price to pay to leave that item. work in someone else's hands.
- No need to spend time creating eBay posts to sell items, or open a retail store.
- No need to pack or deliver the sold items.
Disadvantages
The main disadvantages of the model for the business owner are:
- Dependence on vendors to have a continuous flow of inventory.
- Disposal fees if there are leftovers from a batch of merchandise, which can be reduced by donating the leftovers to charity.
- The need for a software package that makes it easy to keep track of the merchandise.
The main disadvantages for sellers are:
- Receive less than what could be earned if sold directly to online buyers.
- Having to wait for payment.
Examples
Consignment is a trade agreement based on trust, from which both the consignor and the consignee can benefit. Consignment stores are the most common example of this type of exchange. Art galleries also operate as consignees for the artist.
With the advent of Internet and e-commerce sites like eBay.com, consignment has become much more common.
Merchandise often sold in consignment stores includes antiques, sports equipment, automobiles, books, children's and maternity clothing, wedding dresses, furniture, Christmas decorations, musical instruments, tools, toys, newspapers, and magazines.
Example case
Suppose Alexander sends his old typewriter to Helmut, who offers to sell it in his shop.
Alexander (the consignor) and Helmut (the consignee) have not exchanged money. No purchase transaction was made and Alexander is still the owner of the typewriter.
One day a customer buys the typewriter at Helmut's store. Helmut gives Alexander the proceeds from that sale, minus a consignment fee previously agreed upon by Helmut's service as seller of the typewriter.
