Final answer:
Payments to a consignee are treated as consignment sales, with the consignor retaining ownership of goods until sold. The consigned goods remain on the consignor's balance sheet as inventory, and the consignee recognizes a liability until the sale occurs, after which the consignor records revenue and the consignee records income from commissions.
Step-by-step explanation:
When considering payments to consignee for accounting purposes, these are treated distinctly from regular sales transactions. In consignment, the consignor sends goods to the consignee, who acts as an agent to sell the goods for the consignor. It's crucial to understand that the consignor retains ownership of the goods until they are sold.
From an accounting perspective, the consignor reports the consigned goods as inventory on their balance sheet, rather than recognizing revenue upon shipment to the consignee. The consignee never records the goods as inventory because they do not own them. Instead, they recognize a liability to the consignor for the goods on consignment.
When goods are sold, the consignee remits the agreed-upon payment to the consignor. At this point, the consignor will recognize the revenue and remove the related inventory from their balance sheet. The consignee will recognize their commission or profit percentage as income and will clear the liability they've recorded previously.