Accounting Advice Please - Delayed COGS
Discussion
I had a meeting with my accountant yesterday to go through our statutory accounts to November 2019.
She wants to exclude two particularly good sales made in November from the total sales value because they won't be supplied and fitted until February and March. These are B2C sales and total about £15K so are quite significant. However the COGS supplier invoices won't come in until March. These customers paid in advance (they are quite well off) to secure 2019 prices. We have placed POs with the key suppliers and have a good handle on the total costs +/-1%
So it seems quite reasonable to me that these sales are recognised and provision be made in the annual accounts for the coming COGS. I've Googled accounting principles on this and find nothing helpful.
Surely most companies win business where the cost of fulfilling late orders fall well into the following accounting year. Am I missing something here?
Is she wrong to propose excluding these two sales?
She wants to exclude two particularly good sales made in November from the total sales value because they won't be supplied and fitted until February and March. These are B2C sales and total about £15K so are quite significant. However the COGS supplier invoices won't come in until March. These customers paid in advance (they are quite well off) to secure 2019 prices. We have placed POs with the key suppliers and have a good handle on the total costs +/-1%
So it seems quite reasonable to me that these sales are recognised and provision be made in the annual accounts for the coming COGS. I've Googled accounting principles on this and find nothing helpful.
Surely most companies win business where the cost of fulfilling late orders fall well into the following accounting year. Am I missing something here?
Is she wrong to propose excluding these two sales?
RegMolehusband said:
Thank you, but most companies must win sales in the last week of the statutory month where the products or services won't be supplied for a week or two. Should these also be excluded?
In general, yes. It sounds like those are orders being placed but a sale is not normally recognised until something has been delivered.The actual point of recognition can vary depending on the business.
An online retailer like Amazon would recognise the sale when goods are dispatched.
A software system supplier would recognise the sale when the software has been installed, tested and approved by the customer.
An insurance broker would recognise the sale when the policy incepts.
Do you have a stated accounting policy for revenue recognition?
Yes, if goods are supplied shortly following the year end, where the sale was made just inside the FY, then the incoming supplier invoices are accrued and the cost of sale accounted for. There is often a gap of 2-3 weeks between the sale and the supply of goods.
It now seems to me that we should delay the completion of the accounts until the end of March when the invoices relating to these two sales have come in and accrue them rather than make provision for them at this point.
It's just that I wanted the accounts completed early for a change to declare a dividend in this tax year and have it recorded it on the balance sheet.
It now seems to me that we should delay the completion of the accounts until the end of March when the invoices relating to these two sales have come in and accrue them rather than make provision for them at this point.
It's just that I wanted the accounts completed early for a change to declare a dividend in this tax year and have it recorded it on the balance sheet.
Booking sales early is a no-no in accounting terms. It has been a factor is some serious frauds - notably Enron. I'm not suggesting the OP is trying to perpetrate a fraud but trying to account for a sale when it hasn't been actually delivered is not really good accounting (at the very least).
That's very enlightening thank you Eric. I've been in this business for 12 years and both of the accountants I've used have been happy to accrue COGS invoices even though the goods were supplied 1-3 weeks following the year end. Perhaps the fact that POs have been placed and we're waiting for the supplier to manufacture and despatch is good enough. We're not talking large amounts here by the way though the principle is the same I suppose.
Accountants and auditors use a tool called "materiality" when deciding whether strict adherence to an accounting principle is required. If the sale value in question would materially affect whether the final accounts were "true and fair", then the sale should be deferred. If the value of the sales in question are not material, then it doesn't really matter.
A lot of accounting is very subjective and different accountants will adopt different approaches.
A lot of accounting is very subjective and different accountants will adopt different approaches.
RegMolehusband said:
If we take this to the nth degree, it sounds like a distance sale to a consumer shouldn't even be recognised until the 14 days right to cancel has expired which would become very difficult to administer and account for.
Only if the percentage of customers exercising their right to cancel was very high. In reality you would recognise the revenue at the point of dispatch but then reduce revenue by a provision for expected returns - typically a percentage adjustment based on previous experience.RegMolehusband said:
If we take this to the nth degree, it sounds like a distance sale to a consumer shouldn't even be recognised until the 14 days right to cancel has expired which would become very difficult to administer and account for.
No - you look at expectations (so if that happens in say 1% of cases it's not material) and what has happened - by the time you are preparing accounts a 14-day right to return will have expired so you will actually know.I had a slightly stronger reaction than Eric to the original question - the income from supply of goods cannot be booked until the goods have actually been supplied, especially if you haven't received the goods yourself from your supplier. A definite no to that.
Payment is a deposit until the goods are supplied although if you have the item in stock and it's allocated to a customer then that could be a sale before delivery. Even then, you'd look at who carries the risks and rewards of ownership - if you are having to insure the stock then that suggests it is still yours, not the customer's.
oop north said:
RegMolehusband said:
If we take this to the nth degree, it sounds like a distance sale to a consumer shouldn't even be recognised until the 14 days right to cancel has expired which would become very difficult to administer and account for.
No - you look at expectations (so if that happens in say 1% of cases it's not material) and what has happened - by the time you are preparing accounts a 14-day right to return will have expired so you will actually know.I had a slightly stronger reaction than Eric to the original question - the income from supply of goods cannot be booked until the goods have actually been supplied, especially if you haven't received the goods yourself from your supplier. A definite no to that.
Payment is a deposit until the goods are supplied although if you have the item in stock and it's allocated to a customer then that could be a sale before delivery. Even then, you'd look at who carries the risks and rewards of ownership - if you are having to insure the stock then that suggests it is still yours, not the customer's.
I would presume the latter
RMH - can only agree with the above, it flunks just about every UK accounting convention.
If it makes you feel any better though there's another PHer who has had to deal with a £12m prior period adjustment for recognising revenue too early so you're not alone!
If it makes you feel any better though there's another PHer who has had to deal with a £12m prior period adjustment for recognising revenue too early so you're not alone!
Edited by sleepezy on Wednesday 22 January 15:54
2 sMoKiN bArReLs said:
Also, why would you want to bring the corporation tax bill forward by a year?
Tax isn't everything. Businesses are often keen to book their income as early as possible. PLCs are very prone to this because their stock market valuation is very much dependent on profits and reserves.A smaller privately owned company or sole trader business might also want to show as profitable a position as possible because they might be -
a) looking to borrow
b) are trying to sell the business
Eric Mc said:
2 sMoKiN bArReLs said:
Also, why would you want to bring the corporation tax bill forward by a year?
Tax isn't everything. Businesses are often keen to book their income as early as possible. PLCs are very prone to this because their stock market valuation is very much dependent on profits and reserves.A smaller privately owned company or sole trader business might also want to show as profitable a position as possible because they might be -
a) looking to borrow
b) are trying to sell the business
Most SMEs not looking for any of the above though often would want to suppress taxable profits. Some managers bringing forward profit by a week or two don't realise that for that week or two they are accelerating the tax charge by a whole year.
(Speaking as a bloke who spent his whole career squeezing balloons
)RegMolehusband said:
If we take this to the nth degree, it sounds like a distance sale to a consumer shouldn't even be recognised until the 14 days right to cancel has expired which would become very difficult to administer and account for.
Companies have a handle on return rates and make provisions accordingly. Same for warranties etc. It doesn’t preclude recognising the income. 2 sMoKiN bArReLs said:
I get that Eric. Wherever you squeeze the balloon something else pops out.
Most SMEs not looking for any of the above though often would want to suppress taxable profits. Some managers bringing forward profit by a week or two don't realise that for that week or two they are accelerating the tax charge by a whole year.
(Speaking as a bloke who spent his whole career squeezing balloons)
Generally, smaller business are usually tempted to try to reduce their profits wherever possible - but not always.Most SMEs not looking for any of the above though often would want to suppress taxable profits. Some managers bringing forward profit by a week or two don't realise that for that week or two they are accelerating the tax charge by a whole year.
(Speaking as a bloke who spent his whole career squeezing balloons
)Eric Mc said:
2 sMoKiN bArReLs said:
I get that Eric. Wherever you squeeze the balloon something else pops out.
Most SMEs not looking for any of the above though often would want to suppress taxable profits. Some managers bringing forward profit by a week or two don't realise that for that week or two they are accelerating the tax charge by a whole year.
(Speaking as a bloke who spent his whole career squeezing balloons)
Generally, smaller business are usually tempted to try to reduce their profits wherever possible - but not always.Most SMEs not looking for any of the above though often would want to suppress taxable profits. Some managers bringing forward profit by a week or two don't realise that for that week or two they are accelerating the tax charge by a whole year.
(Speaking as a bloke who spent his whole career squeezing balloons
)In one company we discovered we couldn't get on a certain tender list unless the statutory balance sheet was in excess of £400k. We really wanted to be on that list and it really stuck in our craw to leave that much in the business.
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