Consignment Accounting: When Consigned Goods Become Revenue

Consignment is an arrangement in which one party (the consignor) ships its goods to another party (the agent) to sell them on its behalf for a commission, while ownership of the goods stays with the consignor until they are sold to the end customer.

This is common in commercial agencies, showrooms and agency sales platforms. The most frequent accounting mistake: treating the shipment of the goods as a sale, when no sale has taken place yet and neither ownership nor risk has moved.

The core principle: shipping goods to an agent is not a sale.

• The goods stay inside the consignor's inventory, even when they physically sit in the agent's premises.

• No revenue and no profit are recognised on shipment.

• The sale — and with it the revenue — happens only when the agent sells the goods to the end customer.

This distinction decides when revenue appears and for whom, and who carries the inventory on their balance sheet. It also stops a phantom profit from being recognised before its time.

From the consignor's side:

• On shipment: the goods move into an "inventory held by agents" account. They do not leave its assets and are not recorded as a sale.

• When the agent sells them: revenue is recognised in full, the cost of goods sold is recorded, and the agent's commission is charged as an expense.

• Unsold goods stay the consignor's inventory and can be recalled.

That way the consignor's revenue appears at the right moment and at its full value, before the commission is deducted.

From the agent's side:

• Goods received on consignment are not its inventory and do not appear among its assets, because it does not own them.

• The agent tracks them in an off-balance-sheet record (consigned quantities) for control purposes.

• On sale: the agent collects the amount for the consignor and recognises only its commission as revenue.

The common mistake is for the agent to book the full sale value as its own revenue. That inflates its turnover with money that was never its own, and it distorts both its tax position and its profitability.

The single most important point for agents and commercial agencies: your revenue is the commission, not the full booking or sale value.

If an agent sells goods for SAR 100,000 at a 10% commission, its revenue is SAR 10,000, not 100,000. The remaining 90,000 belongs to the consignor and is passed through to it.

Mixing the two inflates the agent's turnover to ten times its real size, distorting Value Added Tax (VAT), profitability and every financial ratio. Separating them properly shows the agent's actual level of activity.

A supplier (the consignor) shipped goods costing 60,000 to an agent to sell, at a 15% commission.

• On shipment: no sale; the 60,000 stays as inventory held by agents in the consignor's books.

• The agent sold the goods for SAR 80,000:

• The consignor: revenue 80,000, cost of goods 60,000, agent commission 12,000 → profit 8,000.

• The agent: commission revenue of 12,000 only, and passes 68,000 through to the consignor.

No revenue appears before the moment the agent actually sells.

A consignment arrangement has consequences you have to get right:

• Inventory: it stays on the consignor's balance sheet, not the agent's, so each party's stock count has to reflect that accurately.

• VAT: it follows the actual sale to the end customer and the agent's commission, not the mere transfer of goods on consignment.

Getting the inventory location or the tax timing wrong is one of the biggest sources of stock-count and filing discrepancies in agency businesses. Review how the Zakat, Tax and Customs Authority (ZATCA) rules apply to your case.

In Snad, consigned goods are tracked in a separate inventory held by agents that stays within the consignor's assets until it is sold, so no revenue is recognised before the actual sale.

On sale, the system records the revenue, the cost and the agent's commission automatically and separates what belongs to the consignor from what belongs to the agent. Each side's turnover and profit then show correctly, and inventory and tax land in the right place.