Question of the day
2026-11-02
Accounting
How does a company account for expected product RETURNS under ASC 606 when it recognizes a sale?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
Revenue is recognized only for the consideration the company expects to KEEP — returns are variable consideration. At the sale date the company
- recognizes revenue net of expected returns
- records a REFUND LIABILITY for the expected refunds; and
- records a RETURN ASSET for the inventory it expects to get back (measured at the former carrying amount of the goods, less recovery costs) instead of expensing that portion through COGS. Example: sell $100 of goods (cost $60) expecting 10% returns → revenue $90, refund liability $10, COGS $54, return asset $6. Estimates are updated each period. Earnings-quality angle: understating the return reserve inflates current revenue, and a spike in actual returns vs. reserve (common after channel stuffing) is a classic red flag.
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