Every now and then it may happen that you have to credit your sales – either returned goods, improper amounts on the invoice etc. There may be numerous reasons, but fact of the matter is, that sometimes you do have to do it.

Now whilst in essence it’s not that difficult, you just recognize an invoice with a negative figure and add it to proper client account, something you do have to be watchful with however is the period which revenue you’re decreasing. In the middle of the period it’s not a question, but if it’s prior period sales (and especially if it happens in January that you have to credit December sales), the credit should also be put into the period the sale it relates to was made.

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Let’s say that you ship off goods to your client on December 15 and since they are delivered by the ship, the expected date of receive for the client is January 14. It’s a long shipment and as such, one should always keep in mind the shipment terms.

If according to the terms the risks and rewards (i.e. ownership) is transferred in a way that the client has to take care of the transport, the customs etc. the goods belong to the client as soon as they are put on the means of transport. Depending on the terms of delivery the ownership is transferred at the time the client is responsible for them.

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Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It’s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line labeled as ‘cost of sales’ or ‘cost of goods sold’. The naming really depends on the type of business and means used to earn revenue. Either its goods you are selling in which case the name is obviously ‘cost of goods sold’, or if its services, than you should replace the word ‘goods’ with ‘services’ and so on. But understandably not all expenses are put under ‘cost of sales’ although it may feel like appropriate. There are different types of expenses one incurs over course of business, but not all are ‘cost of sales’ obviously.

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When you have figured out the period and the fact that this expense has to be recognized, a final question arises and this is a tricky one. It does not have to be difficult, but depending on the situation may require consultation and extra amount of resources in the form of time and money to come up with a figure to put into the accounts.

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What often needs to be assessed is whether certain possible outflows need to be recognized as expense. We have already covered the period in which a certain expense is recognized, but what comes into the equation, is the possibility of this not being an expense later on. We know the period, but since we are not sure of this expense really happening, does it have to be recognized?

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An expense is recognized on an income statement. That’s a fact, right. Well, what almost always raises questions, is the proper period the expense needs to be disclosed in. It’s not always this easy, you know … What I am trying to do now, is bring some insight to this situation. You have an expense and you’re not sure whether it needs to be in current, next or even prior period.

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