Recording Sales and Tax of Consignment Items in QuickBooks

Consignment stores and galleries sell items “on consignment”. They take in items belonging to other people and sell them on the item owner’s behalf. Because they do not purchase these items for resale, they do not have these items in the store or gallery inventory. The owner of the items keeps inventory on these items. Even though the items are not inventory to the store or gallery, they should keep some sort of record of the consignment items including name of the item, a description, and the owner.

The owner of the store or gallery receives a commission on consignment items. Usually, the commission is a percentage of the sale price. The commission they receive upon the sale of the items is revenue to the store.

The store or gallery is responsible for collecting sales tax* on the full sale price at the time of the sale. They must report the full sale price as part of their gross sales on their sales tax report to the State. They are responsible for remitting the sales tax collected to the state. The person who owns the item is not responsible for sales tax.

For example, The Classic Art Gallery sells art on consignment. It allows artists to display their artwork for sale within the Gallery. The Gallery promotes the artwork for sale through advertising. It receives a 50% commission on each sale of an item through its Gallery.

Beverly Lane is an artist. She brings her painting called “Creature of the Night” to The Classic Art Gallery. She signs an agreement with the Gallery that states the Gallery may sell the painting on her behalf for a minimum price of $250. The agreement also states that she will pay the Gallery 50% of the sale price in a commission upon the sale of the painting. This amount will be withheld by the Gallery from the sale price with the balance given to the Artist.

The very next day, a customer comes into the Gallery and purchases the painting for $250. The Gallery rings up the sale, adds the Sales Tax* of 5.5% of the sale price which totals $13.75. The customer pays the Gallery $263.75 for the painting and leaves the store as a happy buyer.

The Classic Art Gallery is pleased that it sold the painting for the artist. Now it must record the sale in QuickBooks. In QuickBooks, the Gallery has the following accounts:

  1. Consignment Liability – Other Current Liability
  2. Commission Income – Revenue Account

It has the following items linked to the above accounts:

Consignment Items in QuickBooks
Consignment Items in QuickBooks

The Classic Art Gallery records the sale of the painting on a QuickBooks Sales Receipt as follows:

Sales Receipt for Consignment Items
Sales Receipt for Consignment Items

The total on the Sales Receipt is $263.75.

The accounts are affected as follows:

  • Consignment Liability is increased by $250.
  • Commission Income is increased by $125.
  • Consignment Liability is reduced by $125.
  • Sales Tax Liability is increased by $13.75

The Classic Art Gallery enters a Vendor Bill from Beverly Lane. The account is Consignment Liability. The amount is $125.

Beverly Lane Vendor Bill for Consignment Sale
Beverly Lane Vendor Bill for Consignment Sale

If you use Accrual Accounting, when you enter this vendor bill, you reduce the Consignment Liability by $125.

If you use Cash Accounting, when you pay this vendor bill, you reduce the Consignment Liability by $125.

The Classic Art Gallery is ready to cut a check to Beverly Lane. It goes to Pay Bills and selects the bill to Beverly Lane. It Selects the correct bank account and Pays the Bill. The Gallery puts the check in the mail to the Artist. Included in the envelope is a copy of the bill so the Artist knows the full sale price of the painting.

Once the Gallery has the information entered into QuickBooks, the account balances for the Gallery will be as follows:

  • Consignment Liability: $0
  • Commission Income: $125
  • Sales Tax Liability $13.75

So far, everything we have discussed has been on behalf of the Gallery. How does this sale affect the artist? The artist owns the painting, so the full sales price is recorded as revenue on her books. The commission she paid the Gallery is recorded as an expense.

The artist’s accounts are affected as follows:

  • Sales Income is increased by $250
  • Commission Expense is increased by $125

The artist has no Sales Tax Liability. It falls on the Gallery to report and remit sales tax*.

Here is a side by side comparison of the Gallery’s accounts and the artist’s accounts upon the sale of the painting (based on Accrual Accounting).

Account The Classic Art Gallery Artist Beverly Lane
Commission Income $125 N/A
Consignment Liability $125 N/A
Sales Tax Liability $13.75 N/A
Sales Income N/A $250
Commission Expense N/A $125

The Gallery records the full sale amount on its books as as a consignment liability. Upon the sale of the item, the Gallery owes the owner the full amount. The Artist owes the Gallery 50% as a commission.

The consignment liability account is then reduced by the amount of the commission that the Gallery keeps for selling the item. The amount the Gallery keeps is recorded as commission revenue. The balance remains as a consignment liability. Once the Gallery records and pays the Bill from the Artist for the balance of the consignment liability, the consignment liability balance is zeroed out. The Sales Tax is paid to the Gallery by the customer on the full sale price and  becomes a sales tax liability of the Gallery.

The Artist records the full sale amount on her books as revenue. She records the commission she paid as a commission expense. The artist does not have any responsibility for the sales tax* so she has no sales tax liability.

If you would like further information or assistance recording consignment sales, please contact me.

*Note: This article is written according to Maine’s rules for Sales Tax. It is for informational purposes only. It is not meant as an authoritative guide to Consignment Sales or Sales Tax. Please consult your accountant and/or your state’s tax authority.

Copyright © 2019 by Julie M. Watkins, All Rights Reserved

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