How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook
How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook
How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook
Copyright © 2021 Leapfin Technologies All Rights Reserved. How to Perform Revenue Recognition 2
Getting Revenue Suppose a customer placed an order
for $1,000 plus 7% sales tax. The customer
Recognition Right
pays a total of $1,070: $1,000 for products
plus $70 for sales tax.
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Some companies currently recognize
revenue when a product is shipped,
but there are still companies that follow
the old accounting standard (ASC 605)
and recognize revenue at delivery.
The same journal entry applies when a
company recognizes revenue at delivery,
but it would be recorded later since
delivery would occur after shipping.
Inventory $600
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If a customer returns an order,
Third-Party Suppliers the following journal entries are recorded:
It’s inevitable that customers will return products. E-commerce This sequence of entries speaks to the
companies will record a returns reserve as a “cushion” to not importance of e-commerce companies
overstate revenue. The reserve is based on historical return trends understanding the revenue cycle and
and reviewed to determine if the reserve accurately reflects points at which to record revenue. In the
return activity. next section, we’ll discuss how to manage
and properly implement ASC 606
when you have the added complexity of
point-of-sale transactions.
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Revenue Recognition for
Point-of-Sale Financing
Many items from Peloton bikes to appliances can now be With point-of-sale loans, retailers can
purchased with point-of-sale financing from FinTech companies recognize revenue immediately. Once
such as Affirm and Afterpay. Point-of-sale (POS) financing, POS financing applications are approved
also known as “buy now, pay later”, enables consumers to make and the product is shipped, the retailer’s
low or no-interest installment payments for purchases.. performance obligations are fulfilled.
FinTech companies provide point-of-sale loans to consumers who Suppose a customer purchases a
are either instantly approved or denied to finance a purchase. dress from a favorite retailer for $300.
Consumers can select a payment schedule for monthly At checkout, the customer is approved
installments or pay in full on a future date. For consumers with for POS financing, payable in 4 monthly
either good credit or short cash flow, these POS loans provide installments of $75. The retailer records
payment options that tend to be more favorable than the following journal entries:
high-interest credit cards.
Example 6:
Aside from helping consumers, POS financing is beneficial to
retailers by creating more sales volume with less risk. Only a few Account DR CR
e-commerce companies offer private label credit cards which
Accounts Receivable $300
provide rewards and loyalty for repeat customers. Point-of-sale
financing fills this gap while expanding consumers’ buying power.
Revenue $300
Point-of-sale financing is a win-win for the customer and retailer.
The customer gets immediate satisfaction from the purchase and
the retailer makes a sale while passing risk to the FinTech company.
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Following the matching principle, the Suppose the retailer has agreed to pay
company must also record the costs the financing company 5% of the sale,
associated with the transaction. the following journal entry is recorded:
Example 7: Example 8:
Account DR CR Account DR CR
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Opportunities for E-Commerce
Companies Implementing ASC 606
While challenging, ASC 606 has provided many opportunities for e-commerce companies to assess operations and
make improvements to bring added transparency and efficiency to their businesses. In the next section, we will outline
some of these opportunities and considerations.
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Supplier & Customer
Relationships
The holiday peak season is when suppliers tighten their
guidelines. Several suppliers and shippers have been
known to withhold shipments if companies fail to make
timely invoice payments. This is another opportunity to
improve processes and ensure you’ve established trust
with vendors so they won’t put your orders on the shelf.
Collaboration With
Cross-Functional Teams
Identifying contracts and performance obligations
per the new revenue recognition standard requires
collaboration amongst multiple functions within an
organization. As the accountants figure out what journal
entries to record, ambiguity in contract terms requires
discussion with the sales team to clarify what’s been
promised to customers. The legal team must review
contracts with customers for clarity and negotiate terms
as needed. Marketing plays a role too since they must
figure out how to best articulate the products and
services the company offers to customers.
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Build Scalable Systems
& Processes
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To Wrap It Up
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About the Author
Leapfin is the #1 finance operations automation platform.
For finance teams facing external pressure from new product
launches, new financing, M&A, IPO preparation, SOX compliance,
and GAAP compliance, Leapfin automates manual processes
and ensures accurate and real-time financial insights.
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