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(The sale of goods is not recognized until the risks and rewards of ownership of the goods have been transferred to the customer.)
Can you tell me what this sentence means?
And what is risk and reward?
I don’t get it!I will use a non business example to try to explain risk and reward first. If you test drive a car most of risks and rewards of doing this are not enjoyed by the diver – it will be time limited and you won’t be able to for example change its colour. Once you buy the car you will be able to go where you want to and change the car’s colour. The risks you bear include keeping brakes in good repair to avoid accidents and legal liability.
A business example might be not recognising a sale until a signed delivery of goods has been made.
A business receives an order from a customer and places the goods ordered in a dispatch area. However, that night, the warehouse burns down. You have to decide who has lost the value of the goods.
Clearly, most people would say that the risks and rewards have not transferred to the buyer and the seller would have to buy the loss. The sale was not made.
If however, the goods had arrived at the buyer’s premises which then burnt down, most people would suggest that they buyer suffers the fire risk and could have enjoyed using the goods. The sale was made.
Finally, if the goods were on a lorry travelling between seller and buyer and the lorry crashes and burns destroying the goods, has the sale occurred or not? Depends on the contract wording.
Thank you sir!
Got it!
The supplier suffers risks as long as goods are kept with him. The risks can be burning of goods, goods expiring or goods stealing.Am I right?
But What are the rewards that the supplier can enjoy when the goods are not sold?
Rewards from unsold goods are primarily potential sale of those goods in the future. When rewards and risks are transferred to a buyer the rewards are generally an increase in cash or receivables for the seller. Important to bear in mind that physical transfer of goods is not always the be all and end all of coming to decision on whether the risks and rewards have been transferred as arrangements such as sale or return exist.
Ok
I see!
You mean the rewards for seller are cash or receivables that the seller enjoys only if they sell goods. As long as goods are unsold, the reward is incorporated in goods, but not enjoyed.Am I right?
I think you are on the right track. It’s a bit like the phrase you can’t have your cake and eat. In other words if you eat your cake now you can’t eat it at a later time. Generally, businesses wish to ultimately maximise the wealth of their owners. Don’t want to get to far off track here but generally they want to keep cycle of their business moving quickly. Stock is still an asset but a business would rather have receivables or cash.
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