According to GAAP, how should one account for concessions?

Question

My company competes in a competetive market...such that discounts are given so often that there is a name for different kinds of sales discounts. One of these is a concession.

Let's say that my company invoices a customer, and the customer disputes the invoice. The invoice is correct as-is, but the company extends a gesture to the customer by crediting the sale anyway. The effect of this is to debit sales as if the sale had never occurred. This is not satisfactory, however, as management wishes to track sales that are surrendered as concessions.

My solution to this has been to book the sale as normal and add a transaction to a contra revenue account (the equivalent of a sales discount account), which leaves the question of how to treat cost of sales. My boss contends that concessions are an expense account, not a contra-revenue account. He says we should move the cost of sales associated with the lost sale to the concession account. But this distorts gross margin.

Help!

Answer 1

Your boss is not entirely wrong. By doing what he wants, there is no sale and therefore no cost of sale, so the GP margin is not distorted. I suggest you take the cost of sale for that invoice to selling expenses but track it separately for management purposes. As an analogy, sometimes you may take a unit out of inventory and use that unit as your display or demo model. In that case, you also take the cost of that unit out of inventory and charge it off to selling expense.

Answer 2

you've just entered the Twilight Zone -- where nothing is either black or white until you know how the information will be used.

management accounting and analyses are like that -- black from one viewpoint and white from a different one.

since he's the boss, it'll be done his way. at least for now. the auditors might have something to say about it later, so keep your workpapers handy just in case you have to retro-actively change the method back to your way.