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Chapter 17. Revenue Recognition and Inco... > Recognizing Revenue During the Cash ... - Pg. 327

Revenue Recognition and Income Determination 327 Allowing for Returns Privileges In some types of sales, the buyer can return the item for various reasons. In fact, in many states, the buyer can even cancel a sale made somewhere other than the seller's normal place of business, without citing a reason of any sort. For revenue recognition purposes, the seller needs to make some assumptions about how much revenue might be returned to the customer, and include this assumption in the amount of revenue that is recognized. Just as with uncollectible credit sales, an allowance for expected returns should be used, at the date of sale, as a contra-revenue account in order to properly measure the expected cash flows resulting from the sale. Recognizing Revenue During the Cash Collection Process As mentioned before, there are certain criteria that must be met before revenue can be recognized at the point of sale. It was also mentioned that complications occur when you recognize revenue at the point of sale, and when those sales are made on credit. In some cases the complications due to credit sales are so great that the collection of the amounts due for those sales become highly uncertain. In that case, revenues should not be recognized at the point of sale. This is the sort of situation that might call for the application of the concepts and methods for rec- ognizing revenue during the cash collection process. There are two ways to do so: the installment method and the cost recovery method. Using the Installment Method If the criteria for point of sale revenue recognition have been met, you would simply recognize the