Can deposits be taken to sales.

Can deposits be taken to sales.

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I have a retail client selling expensive items to order, who takes quite sizable deposits. The goods are then ordered from the supplier. On receipt of the items, the customer is invoiced and the goods supplied on settlement of the outstanding balance. Would it be appropriate to take the value of the deposits held at the year end to sales, as accrued income, with the cost of goods to purchases as an accrual? The deposits will still be shown as a creditor in the BS.

It is rare for a deposit to be refunded as goods are ordered on the strength of the deposit and where it is possible to return them to the manufacturer there is usually a heafty returns charge. So it not common.

The rational for this is that the work was done in the old year, so wages and all the other costs that relate to that sale are in the old year and the cash has been received in the old year.
Neville Ford

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By User deleted
07th Feb 2006 17:22

The quick answer is probably 'no'
In this circumstance the point of recognition of revenue would be delivery of the goods. The deposit is treated as a 'Creditor - Customer Deposits' until the contract has been fulfilled, in your scenario this would be the date the goods were delivered. Whether refunds are rare or not, I do not consider it would be appropriate to recognise the revenue ahead of the completion of the contract.

Whether you would defer other costs depends to a certain extent on the goods being sold, however in the main these would be sunk costs. You mention employee's wages, if these are for sales staff then they would be paid whether or not that particular item was sold. If however there are manufacturing costs, which does not appear to be the case in your narrative, then these would form part of the cost of sales and be deferred to stock.

You might want to review Application Note G on revenue recognition.

I do hope this is helpful.
Regards

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