Revenue Recognition for E-Commerce Companies

retail revenue accounting

There were many standards governing revenue recognition, which have been consolidated into a GAAP standard relating to contracts with customers. The Securities and Exchange Commission imposes more restrictive rules on publicly-held companies regarding when revenue can be recognized, so that revenue may be delayed when collection from customers is uncertain. The effect of the new standard retail accounting on retailer distribution arrangements will depend on the terms of the current contract. The new standard requires management to determine when control of the product has transferred to the customer. Revenue is recognized when the customer or distributor has control of the product, even if the terms include a right of return (i.e., not when the product is transferred to the end customer).

Retailers that expect to be entitled to breakage should derecognize the liability in proportion to the pattern of rights expected to be exercised by the customer, subject to the constraint on variable consideration. Such estimates may be based on historical trends for gift card redemptions, or other relevant information. Accordingly, many e-retailers recognize revenue at the point of shipment as that is when the customer obtains control. Companies consider at what point “risk of loss” transfers to their customers and some may recognize revenue upon shipment.

Immediately upon receiving payment

Entries to record inventory, sales tax, and cost of goods sold must also be recorded. Revenue can be recognized at the point of sale, before, and after delivery, or as part of a special sales transaction. Most retail companies recognize revenue at the point of sale, since the transaction typically involves the immediate exchange of cash or credit for goods or services, as well as the immediate delivery of the goods or services.

Although this variable consideration can be allocated on an individual-contract level, it may also be allocated using the portfolio method (i.e., allocating based on groups of similar contracts). Historical data is needed to reasonably and reliably estimate the amount of refund liability to be recognized under the portfolio approach. For more information on the portfolio approach, please see our article, Contract v. Portfolio Method.

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Hearst Newspapers participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. Rebate programs – Retailers with rebate programs are required allocate a portion of their revenue which will be paid to a customer or credited toward a future order. In order to achieve proper over-time recognition, a reserve should be established by reducing revenue according to this estimated amount. This major overhaul of the revenue recognition framework went into effect for calendar year-end public entities and private entities on January 1, 2018, and January 1, 2019, respectively. Receive timely updates on accounting and financial reporting topics from KPMG. KPMG’s insights on ASC 606 implementation.With the new revenue recognition standard’s effective date approaching, KPMG reports on the most significant industry issues.

retail revenue accounting

Under the new revenue recognition standard, control is the key element in determining when to recognize revenue in reseller and distributor arrangements. ASC 606 also has expanded disclosure requirements including disaggregation of the various revenue streams, outstanding performance obligations at yearend and any assets recognized from the costs to obtain or fulfill a contract. Reviewing contracts in place – Contracts for material revenue streams should be reviewed to identify various performance obligations within each contract. Once identified, individual transaction prices should be assigned to the performance obligations. Consideration should also be given as to when revenue should be recognized on these contracts, particularly when revenue recognition occurs over time, rather than at a point in time. Similar to today’s accounting models, retailers will continue to recognize a liability contract for the obligation to deliver goods and services.