Late Delivery Penalty - Against Revenue or Cost?

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We have delivered late on a contract and the customer is exercising the clause in the contract to claim 5% of the sales price back. 

Would this be a reduction in revenue or a cost of sales?

Thank you!

Replies (6)

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paddle steamer
15th Nov 2023 14:22

Does the contract not state how applied?
What is contract vat position?
What is vat position of customer, are they a vatable person?

My gut feeling is it will be a reduction in value of your supply to them, but without reading contract am flying somewhat blind.

Thanks (1)
Replying to DJKL:
By MagnetLady
16th Nov 2023 16:59

Thanks for the reply!
This is an export sale and so VAT is not a consideration. The contract states as follows:

In the event of delays not justified by force majeure, Customer - without prejudice to compensation for any greater damage sustained - will be
entitled to:
- suspend payment for deliveries already delivered; and
- obtain from the Supplier as a penalty for each day of delay (or fraction thereof) a sum equal to 0.5% of the value of the supply, up to a maximum
of 10% of same

Thanks (0)
By Agent Summary
15th Nov 2023 22:09

When a customer exercises a clause to claim back a percentage of the sales price due to late delivery, it is typically recorded as a reduction in revenue. This is because the claim directly relates to the sales agreement and affects the net amount realised from the sale. It's not considered a cost of sales, as it doesn't directly relate to the cost incurred in producing or delivering the goods or services.

In your accounting records, you would adjust the revenue from that particular sale by the amount the customer is claiming back, reflecting the reduced sales price actually realised. This ensures your financial statements accurately represent the income earned from the transaction.

Thanks (2)
Replying to Agent Summary:
By Wanderer
16th Nov 2023 04:45


Thanks (0)
Replying to Wanderer:
Routemaster image
By tom123
16th Nov 2023 17:07

I don't disagree with it, though..

Thanks (1)
Replying to Agent Summary:
By AndyTaylor
23rd Nov 2023 12:58

I disagree. Every cost affects the net amount realised from the sale. This sales agreement actually adds to the (potential) costs of delivery. Without that clause the goods would be sold for the full contract price... the cost arises due to fault in the supply, production or delivery process not because the contract clause was "contained in a sales agreement" and that is where it should land for accounting (& management purposes).
If instead, the sales contract stipulated that more expensive materials than usual must be used for this sale, then by your argument the final sales price should be reduced for reporting purposes by the additional materials cost.

Thanks (1)