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Dear Lecturer,
I would like to ask you a few questions related to the recognition of sales. I have read through a scenario, but I am not sure how to solve it. It is related to the recognition of sales. Please refer to the below scenario.
Explain whether the following sales should appear in the accounts for the year ended 31 December 2008.
ABC Co. made three sales to customers around year-end, which is 31 December, 2018. The specific details of these three sales are as follows:
A) The customer ordered the goods on 23 December 2008, they were in inventory and were shipped out to the customer that day. The accounts clerk was on holiday at the time and so did not send the invoice or process the double-entry until 6 January 2009, when she returned. The customer paid on 7 January 2009.
B) The customer ordered the goods on 15 December 2008; however, it was an unusual order and the goods were not in inventory at that time. Accounts receivable sent the invoice to the client on 18 December 2008. The goods came into inventory on 21 December and were dispatched to the customer on 31 December 2008. The customer did not pay the invoice until 8 February 2009, which was was later than their agreed credit terms.
C) The customer phoned an order on 30 December 2008. Goods were placed in the dispatch day on 30 December 2008 but were not sent to the client until 2 January 2009. The goods were invoiced on 5 January 2009 and paid for on 7 January 2009.I look forward to hearing the answers from you.
Thank you so much,
Best regards,
A sale transaction that involved the transfer of goods to a customer is satisfied at a point in time and revenue is recognised when the seller satisfies the performance obligation by transferring the goods to the customer.
In your scenarios, when a customer orders or pays for the goods is irrelevant to revenue recognition (if they paid in advance it would be the prepayment that needs to be recognised, as a liability, not revenue).
A) The sale is before the y/e and there is a potential cutoff error – as the goods clearly could not be included in the y/e count of inventory, an adjustment will have to be made to recognise the revenue and receivable at 31 December.
B) SInce the goods were dispatched before the y/e there is no cutoff error. If the goods had not been dispatched until after the y/e there would be a cutoff error because there cannot be an asset of a receivable for goods that are also include in inventory. (The sale would then have to be reversed to correct this.)
C) If you mean dispatch bay (rather than day), there would be a cutoff error if the goods were excluded from inventory because the sale isn’t recognised until the next when the goods are transferred to the customer.
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