Definition: A consignor is the party who delivers goods that they own to another party to hold and sell them on their behalf. In other words, it’s the owner of a product who allows a store to take possession of it in order to sell it for him or her.
What Does Consignor Mean?
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This arrangement is called a consignment and is a very common business practice in the retail industry, especially the retail music industry.
Example
Musicians are like most consumers. They want the latest and greatest products, so they often want to sell their used equipment in order to get newer gear. The only problem is many times they can’t find a buyer. A consignment agreement takes care of this problem. In a consignment, the musician brings his used instrument to a music retailer, the consignee, which sells it to the store’s customers on behalf of the musician. After the instrument is sold, the store takes its commission fee and gives the rest of the proceeds to the musician.
This arrangement works well for both parties. The musician gets to market and sell his used instrument to a new customer base and the music store earns a commission fee based on the sale.
It’s important to note in our example that the music store never actually owns the instrument. It has possession of the instrument while it is being marketed to customers, but the legal title of the instrument always stays with the musician.
This means that the music store will not report this instrument on its balance sheet as a piece of inventory. Instead, it will create a liability account called consignments to show that it currently possesses the instrument, doesn’t own it, and is required to give it back to the owner if the consignment agreement is terminated or the owner decides not to sell it anymore. Typically, these liabilities are reported in the current section on the balance sheet because they are expected to sell within one accounting period.
