When should an internet retailer book revenue? Internet Marketing for Internet Retail : The Preston Blog

When should an internet retailer book revenue?

In auditing our 2006 performance here at Sewell an interesting question came up regarding revenue: when should we book revenue?

Now, we have been in business for five years now and you would think that this question would have come up before (and it has), but I was reminded during this latest round how confusing it can become when you look at special cases including drop-shipping from Asia and prepaying for materials and warehousing them in China.

First of all, if you are doing any significant volume online you probably should be accounting on an accrual basis as opposed to cash. The reason for this is that on a cash basis you will show huge losses while stocking up on inventory and huge profits in subsequent periods - not a very good gauge of how your business is performing.

According to GAAP (Generally Accepted Accounting Practices), you should book revenue as soon as the merchandise is officially the customer’s responsiblity. In other words, if the merchandise catches on fire and burns, who is responsible for the replacement costs?

The easiest way to determine risk is the FOB terms - if you are quoting customer FOB China, you are shouldering all of the risk until the product is in the port waiting to ship - then it is your customer’s responsibility and they should be technically carrying the risk, hence you should book the revenue as soon as it ships. If the merchandise is FOB USA yet shipping from China, you should book the revenue as soon as the merchandise is in the US port.

This is counter-intuitive to most retailers - for instance, when you ship out a product to a customer you typically assume that you are shouldering risk for that product until it is on their doorstep (or, more realistically, in their hands). So should you wait to book the revenue until it is delivered?

I don’t think so - when a customer places an order online technically two transactions are taking place - they are buying your merchandise and the services of a courier to deliver the product to their door. Customers, of course, don’t see two transactions and assume that you are responsible for delivery of their products. I feel the same way when I make a purchase online.

My suggestion is that for accounting purposes you assume that the customer takes ownership as soon as your product ships. If problems arise with the courier, you should do everything possible to help with delivery of the product and replacement if necessary. This is a customer service issue and not an assumption of inventory risk on your behalf.

Following GAAP principles is very important for any retailer with aspirations for an IPO, buyout or even future funding.

11:46 am