Case 3.6 Revenue Recognition
3.6 Revenue recognition with examples when goods are sold under sale or return
There are cases when payments are received prior to events that trigger revenue recognition. In that case, cash is debited and the unearned revenue is credited. On the other hand, when revenue recognition is triggered before actual payment is received, accounts receivable is debited while revenue is credited (“Revenue Recognition Principle,” 2013). Goods are sold under sale or return when they are “sent by the supplier to the customer” with an agreement that the customer is not required to pay until the goods are actually “used or sold by the customer.” If the goods are not yet sold or used by the customer, the customer can return the goods to the supplier. The
conditions in regard to goods under sale or return may vary, depending on the contractual agreement between the supplier and the customer. For instance, the customer has able to sell certain portion of the “shipment sent by the supplier.” The customer intends to send the remaining shipment back to the supplier. However, the supplier “insists” that the whole package has actually been sold. In this case, the goods will be considered as completely owned by the buyer (Fazal, 2012). The basic principle of revenue recognition is indicated in IAS 18 (paragraph 14). Its relevance to the given example is claimed as follows: 1) if the “entity has transferred to the buyer the significant risks and rewards of the ownership of the goods;” 2) whether the “risk and rewards” upon sale of goods have been “transferred or not” (Fazal, 2012). A sale has occurred when the “risks and rewards have been transferred” to the buyer. The proof of evidence when the transfer has occurred can vary in forms, depending on the contract between parties and other situational factors (Fazal, 2012). For example, under the sale or return of goods, when the “risks and rewards” are not transferred to the buyer, the goods will still be included in the “closing stock of the supplier.” The goods will still be included in the “supplier’s accounting books.” This is the rule even if the goods are still possessed by the buyer. Under this case, the buyer cannot include the “goods in his stock”
There are cases when payments are received prior to events that trigger revenue recognition. In that case, cash is debited and the unearned revenue is credited. On the other hand, when revenue recognition is triggered before actual payment is received, accounts receivable is debited while revenue is credited (“Revenue Recognition Principle,” 2013). Goods are sold under sale or return when they are “sent by the supplier to the customer” with an agreement that the customer is not required to pay until the goods are actually “used or sold by the customer.” If the goods are not yet sold or used by the customer, the customer can return the goods to the supplier. The
conditions in regard to goods under sale or return may vary, depending on the contractual agreement between the supplier and the customer. For instance, the customer has able to sell certain portion of the “shipment sent by the supplier.” The customer intends to send the remaining shipment back to the supplier. However, the supplier “insists” that the whole package has actually been sold. In this case, the goods will be considered as completely owned by the buyer (Fazal, 2012). The basic principle of revenue recognition is indicated in IAS 18 (paragraph 14). Its relevance to the given example is claimed as follows: 1) if the “entity has transferred to the buyer the significant risks and rewards of the ownership of the goods;” 2) whether the “risk and rewards” upon sale of goods have been “transferred or not” (Fazal, 2012). A sale has occurred when the “risks and rewards have been transferred” to the buyer. The proof of evidence when the transfer has occurred can vary in forms, depending on the contract between parties and other situational factors (Fazal, 2012). For example, under the sale or return of goods, when the “risks and rewards” are not transferred to the buyer, the goods will still be included in the “closing stock of the supplier.” The goods will still be included in the “supplier’s accounting books.” This is the rule even if the goods are still possessed by the buyer. Under this case, the buyer cannot include the “goods in his stock”