When you’ve transferred the risks and rewards according to agreed delivery terms, that’s when you recognize your sales revenue. 

An excuse that we’ve agreed on sending invoice when the other party has confirmed the delivery is complete or that we’ve agreed with the client, we’ll send the invoice when the ship company has confirmed the goods are on board and we’ve confirmed this confirmation with the client and after which we’ve also sent out an invoice – does not matter! It’s all about the terms of delivery that you’ve agreed with your client. Why even agree on them then? Maybe agree on something else then so that it’s meeting on what’s actually recognized in accounting.

Imagine, you agree that you’ve transferred the risks when the goods are put on board a ship and yet you recognize sales when you’ve sent out the invoice for the sale or even when the goods are delivered at the client’s site. You agree on terms of delivery for a reason – to manage your cash flows for an example and then you go about and ignore on what you agreed with the other party.

Sounds silly, right?

My suggestion:

–          Gain an understanding of risks and rewards;

–          Gain an understanding about the terms of delivery;

–          Recognize revenue based on the agreed terms not something else.

At the end of the day it’s your goods you’ve got overstated, your sales revenue and profits understated on the financial statements.