AccountingWEB guide to revenue recognition

Steve Collings addresses some of the more contentious issues surrounding revenue recognition.

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cfield's picture

Query on Figure 4

cfield | | Permalink

This is a very good article and explains the concepts clearly and concisely. However, I was a bit puzzled about Figure 4 and the 25p adjustment to cost of sales reducing it to £9.75. Surely if goods are being returned and not re-sold later, then there is a stock write-off and costs of sales should go up, not down. I would have thought there would be an offset to the provision for the usual cost of sales figure (in this case £1 being £20 x 10% x £20/£10) and the stock write-off would be debited to Cost of Sales immediately as another provision. In this case, as 50% of returns are not re-sold, the write-off would be 50p (being £10 x 10% x 50%) so Cost of Sales would be reported as £10.50. Maybe I'm missing something here but that seems like the logical accounting treatment to me.

Chris F

 

figure 4

jdavies | | Permalink

I've come across these calculations before with my previous firm. It says half of the returned good will be resold and if I remember correctly this sort of adjustment reflects the impact of the returned goods on the original sale. Its something to do with the provisions standard and is one of those "weird" adjustments.

cfield's picture

What about cancellation fees?

cfield | | Permalink

I found Steve's article interesting as I have a few clients in the travel industry where revenue recognition is an issue. When they sell a holiday or attraction tickets and the travel date is a few months ahead it is common for the customer to pay a deposit of say 20% and the balance a few weeks before departure. Profit is not recognised on such bookings until they have been fully paid up and become unconditional, so the deposits are treated in the accounts as advance payments.

However, when someone cancels there is usually a cancellation fee of about 20% which is often more than the profit the travel company would have made if the booking had gone ahead. This begs an interesting question - when should profit be recognised on bookings? If you know that you are going to earn at least the deposit (less any supplier costs you might incur prior to cancellation) then maybe some profit should be recognised before the contract is fully paid up.

I must admit, I ignore this contractual issue when I do their accounts as it would be a lot of extra work trying to calculate how much profit to recognise on individual bookings taking into account the supplier costs incurred to date. I wonder whether it is theoretically correct to treat all deposits on open bookings as advance payments and all payments to suppliers on these bookings as prepayments.

It would be interesting to hear what other accountants think (but only qualified people who know what I'm going on about please, not the usual anonymous lot who just want to chip in regardless).

Chris F