Question

Envy Inc. an online shoe retailer, has a return policy that allows customers to return merchandise in unused condition for a full refund within 60 days of purchase. Envy knows from past experience that about 12% of sales are consistently returned.   

Describe how/when Envy should recognize revenue and provide a rational (explanation) for your answer.

Answer 1

Envy Inc. should record and recognize the revenue for shoe retailing at the time of making sale. The Sales return should be recorded whenever the customer returns the goods and the same are taken back in the Inventory. Explanation for the same is:

Following the Going concern concept, the sales are considered as good until and unless returned by the customer. Matching principle of accounting says that when goods are issued at the time of sale, then revenues should be recognized and recorded at the time of sale only. The returning of the goods by the customer should be recorded as and when the goods are returned by the customer. The consistency and full disclosure principle of accounting expressly state that we should be consistent with keeping records ie. sales should be recorded at the time of sales and Sales return should be recorded at the time of sales return. Thus, there should be a full disclosure of transactions of the business.