Which method makes more theoretical sense—the gross method or the net method? Why? Why don’t more...

Which method makes more theoretical sense—the gross method or the net method? Why? Why don’t more firms use the net method?

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Answer)

The net method makes more theoritical sense. The net method of accounting for cash/sales discounts recognizes the amount of the potential discount at the time of sale, and each receivable is recorded at its net amount (after the discount), assuming the customer will take the discount.

According to ASC(Accounting Standards Codification) 606-10-32-2, the transaction price is the amount of consideration the company expects to be entitled to in exchange for transfering the promised goods or services to a customer. Therefore, technically the net method is called for by the revenue recognition standard. However, the net method may not be practical for most companies because it is quite labour intensive, requiring analysis and bookkeeping time to calculate and record sales discounts forfeited on each receivable that has passed its discount period. If collection periods are fairly short, any difference between the revenues and receivables that result from the gross method and the net method will probably will be immaterial.

ekkarill92 answered 1 year ago

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