Point of sale, over time, deposits, rights of return

Four shapes the paper uses

Every revenue case on the paper is one of a handful of shapes. Each is decided by asking which criterion, if any, fails today — and then recording the cash where it belongs while the revenue waits.

Worked example — gift cards

In December the café sells 3,000 of gift cards. Cash is in; nothing has been served. Performance fails, so the credit is a liability:

Cash                                      3,000
    Unearned Revenue                                3,000

By 31 December 1,100 of cards have been redeemed for food. Each redemption is performance, so that much of the liability is released — Dr Unearned Revenue 1,100 / Cr Service Revenue 1,100 — and 1,900 stays a liability until it is redeemed. No cash moves at redemption: it moved when the card was sold.

A plan earned by the visit

Kettle Creek Dental Corp. sells a twelve-visit hygiene plan for 4,800, paid on 1 October. The plan is a determinable number of acts — twelve visits — so ASPE's rule is percentage of completion, measured by the acts performed. By 31 December three visits have happened: $4,800\times \frac{3}{12}=1,200$ is revenue; Dr Unearned Revenue 1,200 / Cr Service Revenue 1,200; 3,600 stays unearned. Not 4,800 on 1 October — the cash proves nothing about performance — and not by months elapsed: three months have also passed, but that is a coincidence; had five visits happened, 2,000 would be earned. Compare Northlake's season pass (L7.1), where the acts are indeterminate and the rule is straight-line by time.

A sale with a right of return

Bramble Lane Outfitters sells 8,000 of gear on account with a 30-day return right. Its history says about 5 % comes back. Are the criteria met at the sale? Risks and rewards passed at delivery; the seller keeps no control; collection is assured; and the consideration is measurable because returns can be estimated — an estimate is a measurement. So the revenue is recognised at the sale:

Accounts Receivable                       8,000
    Sales Revenue                                   8,000

The expected returns are dealt with by a separate estimate against revenue — a topic for AFM 182; on this paper, an estimable return right does not defer the sale. What would defer it is a return right whose outcome cannot be estimated — a brand-new product with no history, or a return period so long and generous that the sale is in substance a consignment. Then the measurability criterion fails and revenue waits until the right expires or becomes estimable.

Bill-and-hold and the pattern

A customer asks Bramble Lane to invoice a canoe now and hold it in the store until spring. Invoicing is not delivery; the risks and rewards stay with the store that holds the canoe, and the sale is not revenue until it leaves. The pattern across all four: cash in is never the trigger; an invoice is never the trigger; performance is — and where performance is a series of acts, revenue follows the acts.