Consignment inventory: buying from vendors

Consignment inventory is inventory which is owned by one business, but sold by another. The first business owns the inventory up until the second business sells it, at which point the second business pays for the items. It is a way for businesses to stock and sell items without purchasing them.

It is possible for a business to both purchase inventory on consignment and sell inventory on consignment.

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This article will describe how to use Brightpearl to buy consignment inventory from vendors. To learn how to handle selling consignment inventory to customers, see this article.

When buying consignment inventory from vendors, there are two options on how to handle it, each with their own pros and cons:

  1. Receive the inventory into stock without an asset value

    With this option, you'll receive inventory from your vendor at zero cost. The balance sheet won't display the value of that inventory, since you don't own it, but the cost of goods won't be linked to individual sales orders or channels.

  2. Receive the inventory into stock with an asset value

    With this option you'll receive the inventory from your vendor with an asset value. The cost of goods will be linked to specific sales orders and channels, but your balance sheet will display the value of your consignment inventory, and there are a few extra steps involved.

Option 1: Receiving inventory into stock without an asset value

There are two stages to buying consignment inventory from vendors:

A. Receiving the inventory

  1. Create a purchase order to record the incoming inventory.

    Create a purchase order for the vendor you're receiving consignment inventory from.

  2. Receive inventory against the purchase order at zero value.

    Change the price of the products on the purchase order to be zero, then receive the inventory against the purchase order. The inventory levels of the products will increase, but your accounting will not be impacted.

  3. (Optional) Receive the invoice against the purchase order.

    You can then receive the zero-value invoice against the purchase order in order to complete it and clear up your purchase order list. You may wish to leave it uninvoiced in case you need to unreceive any items from the purchase order to send them back to your vendor.
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B. When items are sold

  1. Fulfil and ship the sales orders.

    When the items sell, fulfil and ship the sales orders as usual. The accounting for these entries will include the revenue made from the sale, but not the cost, as the items are valued at zero cost.

  2. Obtain a list of products sold and send it to your vendor.

    Periodically, normally every month, you will be required to send a list of what products of your vendor's have sold. While there are a number of ways to do it, the easiest way is through the Sales by Product report, located under Reports > Sales by Product.

    Filter this report to the date range required, and filter on the relevant product attribute - a sensible one to use may be 'Supplier':

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    This will give you a list of all products sold in that date range associated with that vendor.

    Learn how to assign vendors to products here.

  3. Enter the vendor invoice.

    After the vendor has received your statement of products sold, they will send you an invoice for those items. You can enter it into the system either as a vendor (supplier) bill, which will post accounting without creating a purchase order, or as a purchase order containing only miscellaneous rows.

    Learn how to enter vendor bills here.
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Option 2: Receiving inventory into stock with an asset value

A. Receiving the inventory

  1. Set up the products with their own consignment inventory and cost of sales account codes.

    With this method, you're receiving inventory into stock with an asset value. Because you don't actually own the stock, you will need to differentiate it from the rest of your inventory in your accounting.

    To do so, create two new account codes: one an asset code for consignment inventory , and one a cost of sales code for consignment cost of goods sold. Learn more about creating account (nominal) codes here.

    Then assign these account codes to your products, under the 'Prices' tab on the right-hand side of the page, or by using an import.
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  2. Create a purchase order to record incoming inventory.

    Create a purchase order containing the products and quantities you're expecting to receive from your vendor.

  3. Receive inventory against the purchase order at the expected cost price.

    The final step is to receive the items into stock. This time, you should receive them in at the cost price you are expecting to be charged once they sell. Do not invoice the purchase order at this stage.

Tip: You can create a purchase order status to distinguish these consignment purchase orders from the rest of your purchases awaiting processing. 

B. When items are sold

  1. Fulfil and ship the sales orders.

    When the items sell, fulfil and ship the sales orders as usual. Unlike the other method, the accounting for these entries will include the revenue made from the sale as well as the cost of sales, using the expected cost price from the previous stage.

  2. Obtain a list of products sold and send it to your vendor.

    Periodically, normally every month, you will be required to send a list of what products of your vendor's have sold. Use the Sales by Product report, as described above, to obtain this list.

  3. Receive the invoice against the original purchase order.

    With this method, you will go back into the purchase order on which you received the goods. Firstly, unreceive the unsold goods by clicking on the received quantity, then using the goods in report to remove them. Learn about unreceiving inventory here.

    Then remove the unsold items from the purchase order, so it is just describing the items which sold.

    Make any price adjustments and receive the invoice as normal.

    Remember to raise a new purchase orders and re-receive the unsold goods!

Tip: After unreceiving the unsold goods, you can split them to a back order instead of manually editing the quantities! Learn more about back orders here.

Accounting for consignment inventory

The two different methods account for the inventory differently. Please consult with your accountant as to which one is appropriate for you to use.

Option 1: Receiving the inventory into stock without an asset value

With this method, you are not recording the inventory as an asset with a value, so there will be no impact to your balance sheet.

When the items sell, the revenue will be recorded against the sales, inheriting the sales channel. However the cost of goods will all be recorded with the vendor invoice, meaning it will not be associated with a sales channel or with individual sales. What this means is that while your income statement will be correct overall, the sales containing the consignment stock will display as being 100% profitable, which may skew your sales reporting.

Option 2: Receiving the inventory into stock with an asset value

With this method, when the items sell, both the revenue and the cost will be recorded against the sales, both inheriting the sales channel. This results in more accurate reporting on a channel basis.

However, you are recording the inventory with a value, even though you do not own the stock.

You are also creating inventory transactions when receiving and unreceiving goods.

Video

This video goes through the two methods mentioned above.

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