Consignment inventory is stock a supplier places in your shop but still owns: you sell it, and pay only for what has sold. Whatever hasn't sold by the end of the agreed period goes back. The supplier carries the risk of slow sellers, and your cash stays free for stock you own.
This guide follows a consignment deal from the first offer to the last settlement. It lists the terms to agree and who records what. Then it works one deal in Uganda shillings against buying the same goods outright.
What is consignment inventory and why it matters
Consignment inventory is an arrangement between two businesses. The consignor is the supplier who owns the goods; the consignee is the shop that holds and sells them.
The shop owes nothing for the goods until a customer buys one. It then pays the agreed amount for that unit and keeps the rest of the price as its share.
It matters because it moves the risk of an untested product from the shop to the supplier. The shop gets a wider range with no cash tied up. The supplier gets shelf space and real sales figures without opening a shop.
It suits goods whose demand nobody knows yet: a new brand, crafts from a local workshop, books from a publisher, a seasonal line. For a line you know sells fast, buying outright earns more, as the worked example below shows.
Two terms sit close to it. Sale or return means you buy the goods and may send back what doesn't sell, as sell-in vs sell-through explains from the supplier's side. Vendor managed inventory is about who decides how much stock you hold, not who owns it.
How consignment inventory works, step by step
A consignment deal runs in seven steps, from the supplier's offer to the goods that come back. Each step leaves a record that the next one depends on.
- The pitch. A supplier offers goods on consignment: often a new line, a seasonal range or a product it wants to test in your area.
- Agreeing on terms. Both sides sign an agreement on the price, your share, the period, the payment dates, returns and damage. The next section lists every term.
- Delivering inventory. The supplier delivers with a delivery note listing each item and quantity. Check the goods against it and sign it: it is the starting count for every settlement.
- Displaying and selling. You shelve and sell the goods like your own. The supplier may add signs, a display stand or product information.
- Tracking sales. You report what sold from your till records, usually weekly or monthly. The supplier may also count the shelf on its visits.
- Paying for sold items. You pay the agreed amount for each unit sold, on the agreed date, with a statement of what sold.
- Returning or restocking. At the end of the period, unsold goods go back, stay for another term, or you buy them if the agreement allows it.
Steps 3 and 5 decide whether the deal ends well. A signed delivery note and a till that records each consigned item give both sides the same numbers at every settlement.
What to agree in a consignment contract
A consignment contract must settle ten points before the goods arrive. A term left unwritten turns into an argument at the first settlement, above all on damage and on unsold goods.
| Term | What to settle |
|---|---|
| Goods and quantities | Each item, its code and the quantity, with the signed delivery note as the record |
| Selling price | Who sets it, and whether you may discount it |
| Your share | A commission on the selling price, such as 25%, or a fixed amount owed per unit sold |
| Settlement | How often, from which report, and how you pay |
| Period | How long the goods stay, such as 90 days, and what happens to unsold goods at the end |
| Damage, theft and loss | Who pays for goods lost in your care, and at what value |
| Insurance | Whose policy covers the goods while they sit in your shop |
| Customer returns | Who refunds a customer who brings a consigned item back |
| Display | Where the goods sit, and any shelf space promised |
| Ending the deal | The notice each side gives, the final count and who collects the goods |
Write it down and both sign it. The agreement and the delivery notes are what your accountant, and the supplier's, will rely on.
Who owns consignment stock, and how each side records it
The supplier owns consignment stock until a customer buys it. It stays on the supplier's books and off yours, even on your shelf. Is inventory an asset lists it first among the goods that aren't yours.
The supplier records no sale when it delivers. IFRS 15, the revenue standard, says so in paragraphs B77 and B78. The signs are that the supplier controls the goods until a set event, can call them back, and isn't paid unless they sell.
Your own revenue depends on whether you act as a principal or an agent. The IFRS Foundation's module on revenue for IFRS for SMEs gives the case of a gallery selling local artists' work.
The artists set the prices, and any work unsold after six months goes back. The gallery carries no inventory risk and doesn't set the price, so it is an agent. It reports only its commission as revenue.
A shop that sets its own price and pays for goods lost in its care looks more like a principal, and reports the full price. Your gross profit is the same either way, so ask your accountant which fits your agreement.
That example comes from the third edition of IFRS for SMEs, which applies from 1 January 2027 and may be used earlier.
Consignment or buying outright: a worked example in Uganda shillings
For example, a gift shop in Kampala takes 60 jars of honey from a beekeepers' cooperative on consignment. The figures are illustrative, not a real shop's.
The terms: the shop sells each jar at UGX 25,000 and keeps 25%, UGX 6,250. It owes the cooperative UGX 18,750 for each jar sold and settles monthly. What is left goes back after 90 days, and the shop pays for any jar broken in its care.
| Month | Jars sold | Jars broken | Paid to the cooperative | Shop's gross profit |
|---|---|---|---|---|
| 1 | 22 | 1 | 431,250 | 118,750 |
| 2 | 18 | 0 | 337,500 | 112,500 |
| 3 | 12 | 0 | 225,000 | 75,000 |
| Total | 52 | 1 | 993,750 | 306,250 |
Month 1's payment is 23 jars × 18,750, including the broken one. Its profit is 22 × 6,250 less the 18,750 owed for the broken jar. The 7 unsold jars go back at the end of month 3.
Now say the cooperative would sell the same jars outright at UGX 17,000 each, cash on delivery. The shop earns UGX 8,000 a jar instead of 6,250, but pays UGX 1,020,000 on day one and keeps whatever doesn't sell.
| Jars sold of 60 | On consignment | Bought outright |
|---|---|---|
| 20 | 106,250 | −188,500 |
| 40 | 231,250 | 141,500 |
| 49 | 287,500 | 290,000 |
| 52 | 306,250 | 339,500 |
| 58 | 343,750 | 438,500 |
Both columns count one broken jar. The outright column assumes unsold jars are cleared at half their cost, UGX 8,500 each.
Buying outright earns more only from 49 jars sold, 82% of the delivery. Below that, consignment earns more, and it never needs the UGX 1,020,000 up front.
The UGX 1,750 a jar the shop gives up is the price of the supplier carrying the risk and the cash. For a line you have never sold, nobody knows whether 49 jars will go. Once a line has proved itself, ask the supplier for a price to buy it outright.
The same test works for any shop in Uganda or elsewhere. Set your expected sales against the share you give up and the cash you keep.
Pros of consignment inventory
Consignment gives the shop range without cash, and the supplier sales without a shop.
For retailers
- Lower upfront cost. You pay for goods only after they sell, so cash isn't tied up in stock for weeks.
- Less risk. What doesn't sell goes back, so you don't write it off or clear it at a loss.
- More variety on shelves. You can try a new line without buying a carton of it, and keep only what your customers buy.
- Less dead stock. Unsold goods leave at the end of the period instead of turning into the overstocking that blocks your shelves.
For suppliers
- More exposure for products. Your goods reach customers in shops you could never open yourself.
- Test new products or markets. Real sales by shop show where a product works before you invest in it.
- Lower storage costs. Stock sits on the shops' shelves rather than in your store.
Cons of consignment inventory
Consignment costs the supplier cash and control, and costs the shop margin and record-keeping.
For suppliers
- Upfront costs, delayed returns. You pay to make and deliver the goods with no promise of a sale, and wait for each settlement to be paid.
- Unpredictable cash flow. Income follows the shops' sales, so a slow month at the shops is a slow month for you.
- Limited control over selling. The shop decides where your goods sit and how hard staff push them.
For retailers
- Liability for loss or damage. You may pay for goods broken or stolen in your care, as the honey shop did for one jar.
- A thinner margin. Your share is smaller than the margin on goods you buy: UGX 6,250 a jar against 8,000 in the example.
- More complex tracking. Consigned goods need their own records and their own settlements, apart from your stock.
- Possible extra costs. Depending on the agreement, you may pay for delivery, insurance or the return of unsold goods.
Best practices for managing consignment inventory
Consignment works when consigned goods go through the till, get counted at every settlement and are paid for on time. Five practices keep it that way.
Use inventory software, not spreadsheets
Sell consigned goods through the same till as your own, marked by supplier. Then sales and settlements come from one record that a cloud inventory system keeps on every device the shop uses.
Track sales performance
Work out each consigned line's sell-through rate at every settlement: units sold divided by units received. Ask the supplier to swap the slowest lines before the period ends.
Run regular inventory checks
Count consigned goods at each settlement. Delivered, less sold, returned and broken, should equal what is on the shelf; any gap is a loss you may owe.
Ask for restocks before the shelf empties
Set a stock alert on each consigned line, and call the supplier when it fires. The supplier decides the restock, and a good seller should not sit empty while you wait.
Communicate clearly
Send the settlement statement with each payment: units sold, broken and on hand, by item. Suppliers plan their next batch from it.
How to record consignment stock in ArmPOS
ArmPOS has no consignment setting, so you record consigned goods with ordinary steps from its Help center. They keep the goods sellable at the till, and show nothing owed until they sell.
- Set up the supplier and the products. Add the consignor under People › Suppliers (Record a purchase), and a Brand with its name (Categories, brands and units). Give each product a Product Cost equal to what you owe per unit sold, and the agreed Retail Price. Sales by Brand then totals each supplier's sales.
- Bring the delivery in. In Adjustment › Create Adjustment, add each item as an Addition, with a Note such as "Consignment, delivery note 041" (Count and adjust stock). The goods can now sell, and nothing is owed.
- Sell as usual. The POS sells consigned goods like any other product.
- Work out each settlement. Open Reports › Product sales report, set the dates and search each product. Its Qty sold times its Product Cost is what you owe (Sales reports).
- Record and pay what you owe. Create a purchase from the consignor for the units sold, with Status received, and pay it with Create Payment (Pay your suppliers). A received purchase adds stock, so follow it with a Subtraction adjustment of the same units, noted "Consignment settlement".
- Handle breakage and returns. Take broken goods out with Damages › Create Damage (Record damaged stock), and add them to the settlement if you pay for them. Unsold goods going back leave with a Subtraction adjustment, noted "Returned to supplier".
- Leave consigned goods out of your stock value. Inventory Valuation multiplies Stock on Hand by Cost for every product, consigned ones included (Stock reports). Take those lines off the total you give your accountant; codes that start with CN- make them easy to find.
Recording the whole delivery as a purchase would show its full value as owed, which consignment stock never is. Paying the supplier as an expense would count the cost twice, because Profit and Loss already takes off each product's cost when it sells.
Frequently asked questions
Who owns consignment inventory?
The supplier, until a customer buys it. The shop holds and sells it, but it stays on the supplier's books.
What is the difference between consignment and sale or return?
Under sale or return, the shop buys the goods and may send unsold ones back for a refund or credit. Under consignment, the shop never owns the goods, so there is nothing to refund.
Who pays if consignment stock is stolen or damaged?
Whoever the agreement names. Many shops agree to pay for goods lost in their care at the amount owed per unit. Write that rule down before the goods arrive.
What is a consignment shop?
A shop that sells second-hand goods for their owners and keeps a share of each sale. It is the same arrangement, with private sellers in place of a supplier.
Before you sign your next consignment deal, write down the price, your share, the period and who pays for breakage. To record consigned goods and see what sold for each supplier, create a free ArmPOS account.
