Accounting – How to Recognize Revenue when Rights of Return are Present
Most business people don’t realize when to and when not to recognize revenue (Also see How to Measure Revenue?). Of course, a sale results in revenue, but when should you recognize this revenue in your business books? Note that you shouldn’t recognize revenues until they are earned. In a case where your products’ return policy allows buyers to return products, the case is different.
Sometimes, customers return the goods they have purchased to the seller. This may happen especially if the goods are inferior, goods damaged before delivery, or any other reason acceptable to the seller. In some cases, buyers have the right to return a purchased good in the future according to the purchase agreement between the buyers and sellers. According to Financial Reporting Standards, you should not recognize the revenue at the time of sale.
You can only recognize such revenue at the time of sale if you can estimate the value of the product that is likely to be returned in the future. This implies that you should also record the estimated product return at the time of sale. However, if you are unable to make a good estimate of the value of products that is likely to be returned, then, you shouldn’t record the revenue until you can estimate the value of the products to be returned by clients or the return rights expires.
Some of the factors that may preclude making a reasonable estimate of products to be returned by your clients include lack of experience with product returns by customers, few sales associated with unique terms, and more. Besides, the lengthy duration for product returns may also make the process of estimating the value of returned products difficult. A good’s or service’s susceptibility to obsolescence and newness of the product may also make it difficult for you to estimate the value of the products to be returned.
Not always a client will return purchased products when they are still in good condition. Some of the products might have been used or deteriorated. In such a case, you should record their net realizable value and this value depends on the costs incurred to make the goods ready for resale and present condition of the goods. Besides, you should recognize the loss caused by the damage inventory.
If your business offers its client’s product return privileges, then, you must understand how to account for such transactions. This will help you to prepare accurate financial statements. Otherwise, it will be wise to use an accounting service in Singapore and leverage on their expertise when managing such tedious tasks.