Picture this: you're a talented artist who's just scored a spot in a prestigious Sydney gallery, or a musician whose merch is sitting pretty in a Brunswick Street boutique. Your products are out there in the world, but you haven't been paid yet. Welcome to the consignment game – where your goods are playing a gig at someone else's venue, but you're still the headliner until the final customer walks through the door with their wallet open.
For creative professionals and businesses across Australia, consignment arrangements represent both opportunity and complexity. You're expanding your reach without upfront capital, but the accounting can feel like trying to read sheet music in the dark. Get it wrong, and you're not just risking a wonky balance sheet – you're potentially running afoul of Australian Accounting Standards and the ATO, which is about as fun as a broken guitar string mid-performance.
The stakes are real: premature revenue recognition, incorrect GST treatment, or sloppy inventory tracking can turn your financial statements into a discordant mess. But here's the good news – once you understand the fundamental rhythm of consignment accounting, you can harmonise your books whilst maximising the benefits of this flexible business model.
Consignment is a business arrangement where one party (the consignor) provides goods to another party (the consignee) to sell on the consignor's behalf. Think of it as your products doing a residency at someone else's venue – they're there, they're available, but they're still yours until someone actually buys them.
Here's where it gets interesting: ownership never transfers to the consignee. The retailer or gallery holding your work doesn't buy your inventory upfront; they simply act as your agent or intermediary. When they successfully sell your goods to the end customer, they take a cut (usually a commission or percentage), and you get the rest. Unsold items? They come back to you without penalty, like band equipment after a tour.
This arrangement differs fundamentally from traditional wholesale models, where retailers purchase goods outright and own them immediately. In wholesale, the retailer bears all the risk of unsold inventory. With consignment, you retain both ownership and risk until that final sale happens. It's the difference between selling your album to a record store (wholesale) versus having them stock it and pay you when copies sell (consignment).
For creative professionals – whether you're a visual artist, designer, musician, or craftsperson – consignment offers a brilliant opportunity to expand your market reach without requiring massive capital from retailers. The Sydney gallery doesn't need $10,000 upfront to stock your collection; they can display your work, sell it, and everyone wins when customers buy.
As the consignor, your accounting needs to track a fundamental truth: those goods sitting in someone else's shop are still yours. This isn't just philosophical – it's a critical requirement under Australian Accounting Standards Board (AASB) 15, which governs revenue recognition.
When you ship consignment goods, you're not making a sale – you're relocating inventory. Your journal entry reflects this movement:
Journal Entry:
This transfers the value from your regular inventory account to a specialised "Consignment Inventory" account. It remains visible as an asset on your balance sheet because you still own it. Any expenses you incur to get those goods to the consignee – freight, insurance, delivery costs – get added to the Consignment Inventory account as well, since these are necessary costs to bring your inventory to its selling location.
Here's where many businesses hit a wrong note: you cannot recognise revenue when goods are shipped to the consignee. Full stop. This is perhaps the most critical principle in consignment accounting, and violating it inflates your revenue figures and breaches AASB 15 requirements.
Revenue can only be recognised when three conditions align:
Until that magical moment when a customer walks out of the gallery with your painting or leaves the boutique wearing your designed jacket, those items remain your inventory. You bear all risks of damage, obsolescence, or the dreaded "nobody wants it" scenario.
When your consignee reports a sale, the accounting rhythm changes. Let's say they sold $6,000 worth of your goods, your cost was $4,800, and their commission is 20% ($1,200):
Recording the sale:
Recording the cost:
Recording the commission:
When unsold goods return to you, they simply move back from Consignment Inventory to regular Inventory. No drama, no revenue impact – they were yours all along.
If you're the gallery, boutique, or shop accepting consignment goods, your accounting looks dramatically different – and in many ways, simpler.
When consignment inventory arrives at your premises, here's what you record: nothing. Well, not quite nothing – you make a memo entry or maintain detailed off-balance-sheet records tracking quantities, descriptions, and agreed commission rates. But critically, consigned goods never appear as assets on your balance sheet.
This principle flows directly from the fundamental accounting concept of ownership. You don't own the goods; you're merely their temporary custodian. Recording them as your assets would misrepresent your financial position – like claiming you own the touring musician's equipment just because it's temporarily stored in your venue.
When you sell consigned goods to a customer, you only recognise your commission as income, not the full sale price. Using the example above where you sold $6,000 worth of goods with a 20% commission:
Recording the sale:
You're acting as an agent, not a principal. The full $6,000 doesn't pass through your income statement as revenue – only your earned $1,200 commission does. This distinction matters enormously for GST purposes, profit calculations, and accurately representing your business performance.
As a consignee, you're responsible for preparing regular "Account Sales" reports for your consignors. These reports show:
This report is the sheet music that keeps both parties playing in tune, ensuring accurate reconciliation and timely payment.
The timing of revenue recognition in consignment arrangements isn't just accounting pedantry – it's a legal requirement under AASB 15 (Revenue from Contracts with Customers), Australia's adoption of the international IFRS 15 standard that came into effect from 1 January 2018.
AASB 15 introduces a critical concept: control. Revenue can only be recognised when the customer obtains control of the promised good or service. For consignment arrangements, AASB 15 specifically identifies three indicators that signal you're dealing with consignment (paragraphs B77-B78):
When these indicators are present, control hasn't transferred to the consignee – meaning no revenue recognition is permitted until the end customer purchases the goods.
This timing difference has profound implications:
Many businesses mistakenly recognise revenue when goods leave their warehouse, treating consignment like a normal sale. This premature revenue recognition artificially inflates profit, misleads stakeholders, and violates accounting standards. It's like claiming you've finished the gig when you've only done the soundcheck – technically incorrect and potentially problematic if auditors come calling.
The Australian Taxation Office distinguishes between two types of consignment arrangements, and getting this categorisation right determines your tax treatment.
Under Income Tax Ruling IT 2472, true consignment exists when:
In this scenario, goods remain the consignor's trading stock. Critically, the consignor can only claim a tax deduction when goods are actually sold, not when shipped to the consignee.
Alternatively, if goods are delivered "on approval" or "on sale or return" where the consignee is effectively committed to ultimate purchase, it's treated as a sale to the consignee. The consignee includes goods as trading stock at delivery, and deductions are available at that point.
The substance of your arrangement matters more than what you call it. Documentation, payment terms, price-setting authority, and return conditions all influence the ATO's characterisation.
GST treatment splits along similar lines:
Agency Sales Model:
This model applies when you set the price, the consignee receives a fixed commission, no ownership transfers to the consignee, and both parties agree to the agency arrangement.
Sale or Return Model:
For imported consignment goods, GST is payable at the time of import to Australian Customs, even though ownership hasn't transferred – though registered importers can claim GST credits in the same tax period.
Even experienced businesses can hit a few bum notes with consignment accounting. Here are the most common mistakes that can derail your financial reporting:
The headliner on the mistakes chart: recognising revenue when goods ship to the consignee rather than when sold to end customers. This violation of AASB 15 inflates your revenue and profit figures, potentially misleading investors, lenders, and tax authorities. Revenue recognition must wait until your consignee reports the actual sale to a final customer.
Consignees sometimes mistakenly record consignment inventory as their own assets. These goods should never appear on the consignee's balance sheet – they're not owned, so they're not assets. Only the obligation to pay the consignor (after a sale occurs) appears as a liability.
Mixing consignment inventory with your regular inventory creates tracking nightmares. Maintain separate "Consignment Inventory" accounts and detailed records showing which goods are with which consignees. Modern inventory management software can automate this tracking, preventing the chaos of manual spreadsheets.
Without detailed consignment agreements, Account Sales reports, and regular reconciliations, you're playing without a setlist. Your consignment agreement should specify commission structure, payment terms, responsibility for freight and insurance, return conditions, and dispute resolution procedures. This documentation protects both parties and provides audit defence.
Consignment inventory must be valued at the lower of cost and net realisable value, per AASB 102. If your goods are sitting unsold at a consignee and market conditions suggest they're worth less than cost, you need to write down the inventory value. The consignor bears obsolescence risk, not the consignee.
Consignees sometimes record the full sale price as revenue (acting as principal) when they should only record commission income (acting as agent). This confusion grossly overstates revenue and misrepresents business performance.
| Accounting Element | Consignor Treatment | Consignee Treatment |
|---|---|---|
| Initial Transfer | Transfer from Inventory to Consignment Inventory (remains an asset) | Memo entry only – no journal entry (not an asset) |
| Revenue Recognition Timing | When goods sold to end customer | Commission earned when goods sold |
| Balance Sheet Impact | Consignment Inventory appears as Current Asset | No inventory asset recorded |
| Income Statement | Full sale price as Revenue; COGS matched to sale; Commission as Expense | Only commission appears as Income |
| Risk of Unsold Goods | Consignor retains all risk | No risk (goods can be returned to consignor) |
| GST Liability (Agency Model) | Consignor liable for GST on sale | Consignee liable for GST on commission only |
| Ownership | Retained until end-customer sale | Never obtained |
Consignment arrangements offer creative professionals and businesses a powerful tool for market expansion without capital intensity. For artists, designers, musicians, and craftspeople across Australia, consignment enables your work to reach customers through established retailers and galleries whilst you retain control and ownership until that crucial final sale.
However, the accounting complexity demands precision. The fundamental principles – delayed revenue recognition, separate inventory tracking, proper risk allocation, and correct principal-versus-agent treatment – aren't optional refinements; they're mandatory requirements under Australian Accounting Standards and tax law.
The timing difference between physical transfer and revenue recognition creates significant implications for cash flow management, working capital, and financial reporting. Understanding whether you're operating under true consignment or sale-or-return arrangements affects your GST obligations, income tax deductions, and trading stock treatment.
For creative professionals building sustainable businesses from their artistic passion, getting consignment accounting right means your financial statements accurately reflect your economic reality. It means confident decision-making based on reliable data, smooth audits when growth attracts scrutiny, and compliance with AASB 15, AASB 102, and ATO requirements.
The key is treating consignment accounting like a complex musical arrangement – every instrument (account) must come in at precisely the right time, playing exactly the right notes. Revenue recognition waits for the final sale. Inventory stays on the consignor's books until that moment. Consignees record only their commission. Documentation keeps everyone on the same page.
With proper systems, clear agreements, and accurate accounting treatment, consignment becomes not a source of confusion but a strategic advantage – expanding your reach whilst managing risk, all whilst keeping your books in perfect harmony.
Ready to crank your finances up to 11? Let's chat about how we can amplify your profits and simplify your paperwork – contact us today.
No. Under AASB 15, revenue recognition requires that control of goods transfers to the customer. When you send goods on consignment, you retain ownership and control until the consignee sells them to an end customer. Goods shipped to a consignee remain your inventory on your balance sheet. Revenue can only be recognised when the consignee reports an actual sale to the final customer.
No. Consigned goods never appear as assets on the consignee's balance sheet because the consignee doesn't own them. They maintain off-balance-sheet records or memo entries to track the inventory, and only record an obligation to pay the consignor when a sale occurs.
GST treatment depends on the structure of the consignment arrangement. In an agency model, the consignor is liable for GST on the full sale if registered, while the consignee only pays GST on their commission. In a sale-or-return model, once goods are delivered and become part of the consignee's trading stock, GST on the full sale amount may apply, with the consignee able to claim GST credits if registered.
Unsold consignment goods are typically returned to the consignor without penalty. From an accounting perspective, the consignor transfers the value from the Consignment Inventory back to regular Inventory. Since no sale has occurred, no revenue is recognised on these returned items.
For true consignment arrangements (sale BY the consignee), goods remain in the consignor's trading stock and you can only claim a tax deduction when the goods are sold to an end customer. In sale-or-return arrangements (sale TO the consignee), the tax treatment differs, and deductions may be available at the time of delivery. Proper documentation and characterisation of the arrangement are essential.
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