Point-of-Sale/Delivery Revenue - dummies

By Maire Loughran

Point-of-sale/delivery is just another way of saying that the company records revenue when it’s earned and realizable. Here are two examples of this: one involving a retail store and the other taking place in a service provider type of business:

  • Retail store: You desperately need a new microwave, so you hustle on down to your favorite discount department store. After selecting the best in your price range, you take it to the checkout, where the clerk scans the barcode, adds sales tax, and tells you the grand total you owe on the sale.

    After the clerk swipes your credit card and gets approval from the issuer of your credit card, you’re the proud owner of a new microwave and the store has a completed point-of-sale transaction.

  • Service provider: The service provider for this example is a printing company. Penway, Inc., orders business cards with its new business telephone numbers from Curry’s Printing. When Curry’s runner drops off the completed order and Penway accepts it, the revenue transaction is considered to be delivered and complete.

Now, just to shake up the fairly simple concept of point-of-sale/delivery, some events reduce the amount of gross revenue per the customer contract for revenue transactions. The two biggies are sales discounts and returns.

How to report sales discounts

Sales discounts are reductions in price that a business gives to a good customer who pays early or buys in volume.

For example, a customer’s invoice may be due in 30 days, but if the customer pays the invoice within 10 days, the terms of the contract allow him to automatically take a 2 percent discount. So if the original invoice amount is $2,000, the customer can reduce the actual amount he pays by $40 ($2,000 x .02).

Discounting a volume purchase occurs anytime a seller gives the buyer a break when placing a larger order. It’s similar to deals you occasionally see in the grocery store when you buy two and get the third item free.

You book revenue transactions involving sales discounts for the entire (gross) amount of the invoices. However, transactions involving volume discounts are booked at the discounted amount.

How to account for returning sales

It’s a sad day indeed when a customer returns a purchase for a refund — but it’s a basic fact of doing business for many companies. Your job as an accountant is to recognize the difference between these types of transactions and understand how to account for them.

Some companies have such a high rate of returns that, in some cases, the business has to put off recognizing revenue.

A good example of this concept is doing business with a mega-chain store such as Wal-Mart or Target, which affords its own customers a very liberal return policy. Any wholesaler marketing products through such a store usually has a contractual agreement allowing the retailer to send returns to the wholesaler. This policy can also include products that didn’t sell.

You record revenue from sales in which the buyer has the right to return the merchandise only if specific conditions are met:

  • The contractual terms regarding the price are substantially fixed or determinable at the date of sale, which is the good ol’ point of sale.

  • The buyer has paid or is obligated to pony up the bucks for the sales transaction. In addition, this obligation is not contingent on the buyer being able to sell said merchandise.

  • The buyer’s obligation to make good on the contract with the seller will not change if the buyer loses possession of the merchandise through events such as theft, fire, or natural disaster.

  • The buyer has economic substance, which means it’s in business to make a profit and isn’t tied to its relationship with the seller.

  • The seller doesn’t have to take significant actions in the future to make the product sellable by the buyer; the buyer is ready to put the product to use.

  • The seller can reasonably estimate future returns.

What happens if these six conditions aren’t met? Well, the seller has to delay recognizing part of the sale or the entire sale until the contractual return period has expired or the six conditions come to fruition, whichever comes first.