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Level 1

Revenue Recognition for Special Orders Including Customer Deposits for a Bridal Salon

Hi, I own a bridal salon and have been having trouble knowing when to recognize revenue and COGS for my primary sales item (special ordered wedding dresses) on our income statement.  I am on an accrual basis with perpetual inventory. Here is an example:

 

  1. Point of Sale (PoS): Bride chooses a $1000 custom wedding dress and pays us a non-refundable 50%  ($500) deposit in cash to order the dress for her.  She leaves the store.
  2. 1 week after PoS: I place the order for the dress with the manufacturer for the wholesale price (let's say $400), but do not transfer any cash to the manufacturer yet.  The manufacturer begins to make the dress.
  3. 3 months after PoS: The manufacturer charges my credit card and ships out the dress to me.
  4. 4 months after PoS: The dress arrives at my store.
  5. 5 months after PoS: The bride comes back to the store, pays for the remaining 50% balance of the dress, and takes it home.

So my question is: What are the journal entries for each of the five steps?

 

My major concerns are determining when I should be realizing the entries to sales/COGS in the income statement and how to handle the inventory account. 

 

A few things to note:

  • There is very little risk of the contract not holding on either side of the relationship.  For >99% of the cases, the bride pays the remaining balance, and we give her the dress she ordered.
  • Brides often pay 100% up front rather than only 50% (which is the minimum deposit).
  • From my reading, it seems like the most "standard" way to deal with this might be to realize the revenue and COGS at Step 5, and then deal with everything through an Unearned Revenue account along the way.
    • HOWEVER, this situation is very disconnected from how the business actually operates and causes the sales revenue account to give very little insight into how the business is actually performing.
      • For example, suppose in Jan 2020, we sell (aka receive deposits and place orders for) 100 dresses and then never sell another dress for the next two years.  Then, January was a great month and all the other months were terrible.  I would like our revenue and gross profit to reflect that on the monthly income statement.
      • In my original multi-step example above, the timeline for each step is actually very random and product dependent.  Some brides wait over a year between Step 1 and Step 5.
      • Therefore, if we choose to only report revenue and COGS at Step 5 for the "Great January" situation above, $0 of sales would be reported in January and random sales would be scattered throughout the next two years.
      • This monthly income statement would be useless at showing what months we were performing well.  Even a cash basis would reflect the timing of sales better than this.
  • So ideally, I would like the revenue and COGS to be recognized at the PoS, when the contract is signed and the order is placed.

Is there any way to achieve this? 

 

Thank you!

 

2 Comments
Level 8

Revenue Recognition for Special Orders Including Customer Deposits for a Bridal Salon

Interesting question, here is what I would do based on what you described thinking GAAP accrual-basis. Definitely not straightforward.  This s/b a question in accounting class.

 


  1. Point of Sale (PoS): Bride chooses a $1000 custom wedding dress and pays us a non-refundable 50%  ($500) deposit in cash to order the dress for her.  She leaves the store.
  2.  DR Cash and CR Deferred Revenue $500
  3. 1 week after PoS: I place the order for the dress with the manufacturer for the wholesale price (let's say $400), but do not transfer any cash to the manufacturer yet.  The manufacturer begins to make the dress.
  4. DR Prepaid and CR Accts Payable $400
  5. 3 months after PoS: The manufacturer charges my credit card and ships out the dress to me.
  6. DR AP and CR Cash $400
  7. 4 months after PoS: The dress arrives at my store.
  8. DR Inventory and CR Prepaid $400
  9. 5 months after PoS: The bride comes back to the store, pays for the remaining 50% balance of the dress, and takes it home.
  10. DR Cash $500 DR Deferred Revenue $500 and CR Revenue $1000 (earned)
  11. CR Inventory and DR COGS $400

Agree would be tempted to record final sales/COGS in Step 5.  

 

So my question is: What are the journal entries for each of the five steps?

 

My major concerns are determining when I should be realizing the entries to sales/COGS in the income statement and how to handle the inventory account. 

 

A few things to note:

  • There is very little risk of the contract not holding on either side of the relationship.  For >99% of the cases, the bride pays the remaining balance, and we give her the dress she ordered.
  • Brides often pay 100% up front rather than only 50% (which is the minimum deposit).
  • From my reading, it seems like the most "standard" way to deal with this might be to realize the revenue and COGS at Step 5, and then deal with everything through an Unearned Revenue account along the way.
    • HOWEVER, this situation is very disconnected from how the business actually operates and causes the sales revenue account to give very little insight into how the business is actually performing.
      • For example, suppose in Jan 2020, we sell (aka receive deposits and place orders for) 100 dresses and then never sell another dress for the next two years.  Then, January was a great month and all the other months were terrible.  I would like our revenue and gross profit to reflect that on the monthly income statement.
      • In my original multi-step example above, the timeline for each step is actually very random and product dependent.  Some brides wait over a year between Step 1 and Step 5.
      • Therefore, if we choose to only report revenue and COGS at Step 5 for the "Great January" situation above, $0 of sales would be reported in January and random sales would be scattered throughout the next two years.
      • This monthly income statement would be useless at showing what months we were performing well.  Even a cash basis would reflect the timing of sales better than this.
  • So ideally, I would like the revenue and COGS to be recognized at the PoS, when the contract is signed and the order is placed.

Is there any way to achieve this? 

 

Thank you!

 


 

Level 1

Revenue Recognition for Special Orders Including Customer Deposits for a Bridal Salon

We have similar problem. But this answer does not seem practical. Doing all these journal entries.  What is the correct way to set up QB to handle this. If it just a bunch of journal entries then we don't really need QB, we could just use a Excel sheet.

 

How can QB be set up to handle this?



 

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