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Point of Sale (POS) Method

See Also:
Accounting Principles
Percentage of Completion Method
Completed Contract Method
Cost Recovery Method
Installment Method

Point of Sale (POS) Method Definition

The Point of Sale (POS) Method also known as the Revenue Method or Sales Method is one of the many methods under the Revenue Principle of Accounting. This method records the revenue at the point of sale because cash is received on site or it is reasonably certain that cash will be received soon and is thus a finalized transaction. They commonly use this method in grocery stores or other entities such as Wal-Mart. Companies can also record a sale if the amount of revenue can be measured objectively and the receipt is certain which becomes useful for companies such as a mining or lumber company. Another use of the method can be associated with a service that is provided like cable, car services, and certain utilities.

Point of Sale (POS) Method Examples

Incorporate the method of sales in several different ways. We will give various examples to explain the method.

Example 1:

Suppose that Fred goes into a music store to buy a CD. He makes a selection and then pays 15 dollars cash or the price of the CD to the store clerk. The music store would then use the sales method to record Fred’s purchase of the CD. The sales method would then post the following journal entries in recording the sale.

Cash…………………………………$15
Sales Revenue………………………………..$15

COGS………………………………..$10
Inventory……………………………………….$10

Example 2:

Timber Inc. specializes in the cutting and transportation of lumber. The company has recently sent a load of lumber with a costs of $10,000 to Furniture Inc. Since Timber Inc. has already delivered the goods to the customer (Furniture Inc.), Timber Inc. can go ahead and recognize the revenue because it has been objectively measured and there is reasonable certainty that the company will receive cash in the near future. Therefore, record journal entries as follows:

At time of Delivery:

Account Receivable (A/R)………..$10,000
Sales Revenue………………………………..$10,000

Upon Receipt of Cash:

Cash…………………………………..$10,000
A/R………………………………………………..$10,000

Example 3:

Plumber LLC performs plumbing work to households. Recently, they performed services to Brian because his kitchen drain was clogged. To unclog the drain Johnny the Plumber, an employee of Plumber LLC, snaked the piping and fixed the problem in an hour. Plumber Inc. can go ahead and bill Brian for an hour of service provided by Plumber LLC. Since the service has already been performed, the company needs to recognize the revenue under the sales method as follows:

At the time service is performed:

A/R……………………………………..$100
Service Revenue……………………………….$100

Upon the receipt of cash:

Cash…………………………………..$100
A/R………………………………………………….$100

Point of Sale (POS) Method

 

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Installment Sales Method

See Also:
Accounting Principles
Point of Sale Method (POS)
Collection Method
Percentage of Completion Method
Completed Contract Method

Installment Sales Definition

The Installment Method of revenue recognition under the revenue principle deals with sales that require periodic payments over a specified time period usually established within a contract called the installment sales contract.

Installment Sales Explanation

Due to conservative practices in business, the installment sales method of accounting finds the gross profit percentage associated with the total sale and recognizes this percentage as gross profit as the periodic or installment payments are received. Therefore, the company does not recover the cost of the goods sold or the gross profit until the last payment has been made by the customer. The installment method is generally used by real estate companies because the cost of land can be substantial and paying for the total cost up front is simply not possible.

Installment Sales Method Example

The following Installment sales method example explains how a company would use the Installment Sales method:

For example, Real Estate Company has just sold a large parcel of land to Case Co. at a price of $1 million. Case signed an installment sales contract that requires payments of $150,000 over the next 6 years and an up-front payment of $100,000. The cost of the land sold for Real Estate is $600,000. Thus the gross profit they will recognize under the method at the end of the installment sales agreement would be $400,000.

Gross Profit percentage = Gross Profit/Sale Price = $400,000/$1 Million = 40% Year 1 during the year:

Installment Accounts Receivable (A/R) ………………………$1,000,000
Installment Sales …………………………………………………………………………$1,000,000

Cost of Land Sold ………………………………………………………$600,000
Land………………………………………………………………………………………………$600,000

Cash…………………………………………………………………………….$250,000
(up-front payment of 100,000 + year 1 periodic of $150,000)
Installment A/R……………………………………………………………………………..$250,000

Year 1 end of year:

Installment Sales………………………………………………………..$1,000,000
Cost of Land ………………………………………………………………………………..$600,000
Deferred Gross Profit………………………………………………………………….$400,000

Deferred Gross Profit ……………………………………………….$100,000 (250,000*40%)
Realized gross profit on Installment Sales……………………………………$100,000

Year 2-6 end of year:

Deferred Gross Profit…………………………………………………$60,000
Realized gross profit on Installment Sales………………………………………..$60,000

Notice that the total amount at the year 6 end will show the total amount of gross profit.

Year 1 Gross Profit realized=$100,000
Year 2 Gross Profit realized=$60,000
Year 3 Gross Profit realized=$60,000
Year 4 Gross Profit realized=$60,000
Year 5 Gross Profit realized=$60,000
Year 6 Gross Profit realized=$60,000
Total Gross Profit realized =$400,000

Note: To simplify the transaction accounting, interest has been left out. There is also an assumption that the company has not made any other sale outside of this one. If the company had made any other installment sales, then the gross profit percentage would need to be recalculated each year and applied to the cash receipts.

Installment Sales method

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Cost Recovery Method

See Also:
Accounting Principles
Point of Sale Method (POS)
Installment Method
Percentage of Completion Method
Completed Contract Method

Cost Recovery Method Definition

Also known as the collection method, cost recovery method accounting is a way of recognizing revenue under the revenue principle. The method is commonly used in conjunction with companies who do not believe that they will receive a future payment of cash or it is highly unlikely that they will.

Cost Recovery Method Explanation

When using collection method accounting a company will commonly reduce the accounts receivable account through the allowance for doubtful accounts. It will then only recognize the revenue upon the receipt of cash up to the inventory or service amount. In other words, if a company only receives cash of $20,000 for an inventory item costing $50,000, then the company will defer this recognition of revenue until the other $30,000 has been received in cash. Because the company has reduced the amount of revenue that it would normally recognize under the accounts receivable account, cost recovery accounting is the most conservative form of revenue recognition.

Cost Recovery Method Example

The following is a cost recovery method example. It shows when a company should adopt recovery cost to paint a better picture of what sort of condition the company is in:

For example, Steel Company is a company that supplies steel to customers who use that steel to make all sorts of items. These items range from beams to construct buildings to ship building companies. One of Steel’s long time customers Ship Builders R’ Us has recently been going through some trouble. It is becoming more and more likely that the company will need to file for bankruptcy. Because of this Steel Company has decided to use the cost recovery method of revenue recognition. The inventory that has been sold to Ship Builders is in total around $500,000 with a cost to Steel Company of $400,000.

The company is expected to pay Steel in installments of $100,000 in the next three years (2008, 2009 and 2010). They have already paid Steel $200,000 upon the sale in 2007. Thus the company needs to take the installments out of accounts receivable to reduce the amount of revenue. Then the company will not recognize revenue until the end of 2009 when the total cash paid is $400,000 or the cost to Steel Co. The last payment in 2010 is like any normal sale assuming that it occurs because the full cost was recovered in 2009.

Note: The above example does not account for interest.

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cost recovery method

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Accounting Principles 5, 6, and 7

See Also:
Accounting Principles 1, 2, and 3
Continuous Accounting: The New Age of Accounting
Accounting Concepts
Point of Sale (POS) Method
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)
Adjusting Entries
Accumulated Amortization

Accounting Principles 5, 6, and 7 Description

Basic accounting principles are both generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Let’s look at the Revenue Principle, the Matching Principle, and the Disclosure Principle

Revenue Principle

The Revenue Principle, also known as the Revenue Recognition Principle, contains several different methods regarding the timing and amount to record as revenue. In accordance with this, meet the following three conditions for each and every sale. First, a company must have performed a service or provided a product to expect a return from the buying party. Then the amount of the sale should be readily measurable. Finally, there should be a reasonable amount of expectation that the company will receive payments. But to insure that this happens, the following six methods of accounting for revenue. which differ according to conditions that surround the business model, can be found below:

1) Sales Method

2) Completed Production Method

3) Collection Method

4) Installment Method

5) Percentage of Completion Method

6) Completed Contract Method

Matching Principle

The matching principle is a way of setting the expenses of a company next to their respective revenues. Once you use one of the above revenue principle methods, then match up the incurred expenses during the same period that the revenue was recognized in the company. But by doing this, the company establishes that the income for the period revenue has been recognized.

Disclosure Principle

Lastly, the disclosure principle states that a company’s financial statements need to and should contain enough information to outsiders so that they can make well informed decisions about a company. In most cases this is pretty straightforward, but for some policies, issues, and uncommon transactions the way in which a company should disclose information can become unclear. Include the following to cover the majority of issues and events within the financials as to avoid misleading investors.

1)  Significant Accounting Policies

2) Probable Losses

3) Accounting Changes

4) Subsequent Events

5) Business Segments

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accounting principles 5, 6, and 7, revenue principle, matching principle

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accounting principles 5, 6, and 7, revenue principle, matching principle

 

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