- 7 - 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".Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011