There are different methods for handling consignments in various bookkeeping systems. In QuickBooks, one very efficient way to account for consignments is to incorporate the use of Sales Orders. Sales Orders are “non-posting” transactions, so they will not affect your financials or your Inventory on hand levels. You can set up your QuickBooks Inventory system to give you warnings about Inventory items being on Sales Orders when you try to use these Inventory items in other transactions, but the Sales Orders will NOT affect your financials.
When you transfer Inventory items to someone who will display and sell your Inventory for you at their business location (a consignee), you will want to create a Sales Order in QuickBooks reflecting all the Inventory items and amounts that are consigned. You will do this in lieu of creating an Invoice because QuickBooks will automatically reduce your Inventory items on hand when using them on Invoices, and the software will consider the items sold and shipped. By using the Sales Order instead of the Invoice, we are telling QuickBooks to keep these items on hold as they are designated for someone else, but not “sold” yet. QuickBooks will only adjust the item availability, which is different from items on hand.
After the consignee sends you a sales report indicating which of your items have been sold, you will take your Sales Order in QuickBooks and convert it into an Invoice. You will only Invoice the consignee for the Inventory items they have sold, and the remaining items will stay on the Sales Order until they have all been Invoiced. Once all the items on a Sales Order have been Invoiced, the Sales Order will be closed. When you create the Invoice for the items your consignee sold, QuickBooks will then reduce the quantity on hand for those Inventory items, which will reflect in your Cost of Goods Sold and profit margin calculations.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.