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account for sales, such as, for example, at the time of shipment
or title passage or acceptance, but the expectation that some of
the merchandise may be returned after the date of sale for credit
or refund does not warrant the postponement of accrual. The way
that the accrual method of accounting corrects the overstatement
of income resulting from the return of merchandise is by allowing
the seller a deduction in the year of return for the amount of
the credit or refund given to the purchaser. In periods of
generally rising sales and fairly constant rates of merchandise
returns this method of accounting leads to persistent
overstatement of income. In the print and sound recording
industries, where merchandise returns regularly constitute a
substantial percentage of total sales, the general accrual
principles were perceived to be inconsistent with economic
realities and unfair.
The Senate Finance Committee report accompanying the Revenue
Act of 1978 gave its assessment of the problem as follows:
Reasons for change
Publishers and distributors of magazines,
paperbacks, and records often sell more copies of their
merchandise than it is anticipated will be sold to
consumers. This "overstocking" is part of a mass-
marketing promotion technique, which relies in part on
conspicuous display of the merchandise and ability of
the retailer promptly to satisfy consumer demand.
Publishers usually bear the cost of such mass-marketing
promotion by agreeing to repurchase unsold copies of
merchandise from distributors, who in turn agree to
repurchase unsold copies from retailers. These unsold
items are commonly called "returns".
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Last modified: May 25, 2011