Receivables and Revenue
Recognition
15.511 Corporate Accounting
Summer 2004
Professor SP Kothari
Sloan School of Management
Massachusetts Institute of Technology
June 22, 2004
1
,See Intel Corporation’s consolidated balance sheets:
December 25, 1999 and December 26, 1998, available at
http://www.intel.com (last accessed July 9, 2004).
, ALLOWANCE FOR RETURNS
If customer has the right to return the product, the seller must
estimate the dollar value of returns.
Revenue is reported net of the amount expected to be returned.
Typically, seller sets up a contra-asset account, Allowance for
Returns:
• Analogous to Allowance for Doubtful Accounts
• When return actually occurs, reduce both Allowance and face
value of Accounts Receivable (or Cash) by the invoice amount.
• Return has no effect on Net Income, nor on Net Assets, just as
Write-off of Uncollectible has no effect on these amounts.
• BSE: AR - Allowance for Returns = RE
Intel takes a slightly different approach: Deferred Income Liability.
3
Recognition
15.511 Corporate Accounting
Summer 2004
Professor SP Kothari
Sloan School of Management
Massachusetts Institute of Technology
June 22, 2004
1
,See Intel Corporation’s consolidated balance sheets:
December 25, 1999 and December 26, 1998, available at
http://www.intel.com (last accessed July 9, 2004).
, ALLOWANCE FOR RETURNS
If customer has the right to return the product, the seller must
estimate the dollar value of returns.
Revenue is reported net of the amount expected to be returned.
Typically, seller sets up a contra-asset account, Allowance for
Returns:
• Analogous to Allowance for Doubtful Accounts
• When return actually occurs, reduce both Allowance and face
value of Accounts Receivable (or Cash) by the invoice amount.
• Return has no effect on Net Income, nor on Net Assets, just as
Write-off of Uncollectible has no effect on these amounts.
• BSE: AR - Allowance for Returns = RE
Intel takes a slightly different approach: Deferred Income Liability.
3
