Accounting for non-refundable deposits

May 2004
Accountancy;May2004, Vol. 133 Issue 1329, p88
Trade Publication
This article elaborates accounting treatment of non-refundable deposits. In the case given, D plc is a retailer of furniture and requires customers to pay a deposit of 25% of the purchase price when placing an order. The remaining 75% is payable on delivery of the furniture. In the event that the customer cancels the order, the company retains the deposit. If D is unable to fulfill the customer's order, the deposit is repaid in full. The question is whether D plc should recognize the 25% deposit as revenue on receipt and then recognize the remaining balance on delivery of the furniture. D plc should not recognize any revenue under the International Financial Reporting Standards or British Generally Accepted Accounting Principles until the goods have been delivered to and accepted by the customer or until the customer cancels the order. International Accounting Standard 18, Revenue, requires that revenue relating to the sale of goods is recognized when the risks and rewards of the goods have been transferred to the buyer, but only where the revenue and costs can be reliably measured and to the extent that it is probable that the economic benefits of the transaction will flow to the entity. Application Note G to Financial Reporting Standard 5, Reporting the Substance of Transactions, requires that revenue is recognized as a seller obtains the right to consideration in exchange for performance.


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