Consignor and his Responsibilities

Consignor is an individual or business entity that owns goods and sends them to another party (the consignee) for the purpose of sale. In a consignment arrangement, the consignor retains ownership of the goods until they are sold by the consignee to a third party. Consignors play a critical role in the supply chain, especially in industries where goods are distributed across various retail outlets without immediate transfer of ownership.

To successfully manage a consignment arrangement, a consignor must undertake several responsibilities, ensuring smooth operations and accurate financial reporting. Below are ten key responsibilities of a consignor in a consignment transaction.

1. Preparation of Goods for Shipment

The consignor is responsible for preparing goods for shipment, which includes packaging, labeling, and organizing the products for safe transport. Proper packaging ensures that the goods are protected from damage during transit and arrive in good condition. This step is critical to maintain the quality of the goods and their marketability.

2. Documenting the Consignment

One of the primary duties of the consignor is to prepare the necessary documentation for the consignment. This includes preparing the consignment note, which outlines details such as the description of the goods, quantity, value, and terms of sale. Additionally, the consignor must generate an invoice for the consignee, detailing the expected sale price and commission.

3. Maintaining Ownership of Goods

Although the goods are physically transferred to the consignee, the ownership remains with the consignor until the goods are sold to a third-party customer. The consignor must track and maintain legal ownership of the goods during the consignment period. In the event of loss, damage, or theft, the consignor bears the associated risks.

4. Setting Pricing Terms

The consignor is responsible for determining the sale price of the goods. The pricing structure is communicated to the consignee, who sells the goods on behalf of the consignor. It is the consignor’s responsibility to set a competitive price that aligns with market conditions while ensuring profitability.

5. Providing Marketing Support

In many consignment agreements, the consignor may also provide marketing support to the consignee. This could include advertising materials, product promotions, or brand awareness campaigns to help the consignee attract customers and increase sales. Supporting the consignee with marketing efforts can result in faster sales and greater profitability.

6. Tracking Inventory

While the consignee physically holds the goods, the consignor must track the inventory. This involves monitoring the number of goods sold, remaining stock, and managing unsold or returned goods. Accurate inventory tracking is essential for financial accounting and timely replenishment of stock if needed.

7. Handling Unsold Goods

The consignor is responsible for handling unsold goods at the end of the consignment period. If the consignee is unable to sell the goods, the consignor may choose to either retrieve the goods or allow the consignee to continue trying to sell them. In cases where unsold goods are returned, the consignor must cover the cost of return shipping and manage the returned inventory.

8. Recognizing Revenue

A key responsibility of the consignor is recognizing revenue only when the goods are sold by the consignee. This means the consignor does not record sales revenue at the time of shipment but waits until the consignee reports a sale. This practice aligns with the revenue recognition principle, which dictates that revenue is recognized when it is earned, not when goods are delivered.

9. Handling Returns and Defective Goods

The consignor must also handle the return of defective or unsatisfactory goods. If the consignee returns damaged goods or reports a customer return, it is the consignor’s responsibility to replace or repair the goods or issue a refund. Handling returns promptly helps maintain a strong business relationship with the consignee.

10. Paying Commissions

The consignor is responsible for compensating the consignee for their services in selling the goods. This is typically done by paying a commission on the sale of the goods. The commission rate is agreed upon in advance and is deducted from the sale proceeds before the consignee remits the balance to the consignor. Ensuring that the consignee is paid fairly and promptly helps foster trust and long-term collaboration.