Sale or return basis is a term used to refer to an arrangement whereby goods are sent by a business to a customer on the understanding that the customer will either approve and retain the goods or return then within a specified period of time.
A business expects to receive consideration for the sale of goods to its customers. Since accounting periods are for a defined time period a process is needed to allocate the correct amount of consideration to the correct period. This process is referred to as revenue recognition and is applied using a five step revenue model.
Unearned revenue is generated when a business supplies its services to a customer and the services are invoiced in advance.
For example, suppose a business provides maintenance services and invoices for annually in advance. At the time of invoicing the service has not been provided and none of the revenue has been earned, it therefore needs to be credited to the unearned revenue account.
The percentage of completion method is used to calculate the amount of revenue and income that can be recognized by a business on a long term project. The method is in accordance with the matching or accruals concept of accounting, and ensures that the costs incurred on the project are matched to the revenues arising from that project.
When a business receives a cash advance from a customer for goods not yet delivered, it needs to record this a balance sheet liability and not revenue. When the goods are delivered, the revenue is earned, and the cash advance can be used to clear the balance on the customer accounts receivable account.
A business earns interest on its money deposits of 1,000 but does receive the amount into its bank account until after the month end. As the income has been earned but not received, it needs to be accrued for in the month end accounts.
The double entry bookkeeping journal entry to show the accrued income is as follows: