How do sellers measure revenue?
REVENUE MEASUREMENT
The seller measures revenue as the amount of cash, or the cash-equivalent value of other assets, that it receives from customers. As a starting point, this amount is the exchange price between buyer and seller at the time of sale. If the firm has not performed all of its obligations, however, it will need to adjust the exchange price to reflect those unperformed obligations. Two common examples of adjustments are sales discounts and allowances, and sales returns.
Sales Discounts and Allowances
Customers may take advantage of discounts for prompt payment, and the seller may grant allowances for unsatisfactory merchandise. In these cases, the exchange price exceeds the cash collected and retained by the seller. The seller must estimate the amounts for sales discounts and allowances and reduce the related revenues recognized by those amounts.
Sales Returns
Customers may return goods for cash refunds or, if the customer has not yet paid, for cancellation of the customer's obligation to pay. If so, the seller will collect and keep cash in smaller amounts than the sum of the exchange prices. The seller must estimate the amounts of expected sales returns and reduce revenues recognized by those amounts.
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