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Some industries offer customers “the right to return a product to the seller under certain circumstances” (ASC 605-15-05-3). Since this directly affects inventory, returns impact year-end counts. In order to correctly value inventory, returns are to be matched properly. When a company sells its items with a right of return, revenue from the sales may be recognized at the time of the sale if certain conditions are met: the price must be fixed and the buyer must pay or commit to a payment, the seller should not have any future performance obligations that will directly bring about resale of the product by the buyer, and the amount of future returns must be reasonably estimated (605-15-25-1). Proper authoritative guidance allows returns to be made by either the direct customer or a party to which the goods were resold. However, there are reimbursement options for returned products. Some companies offer a refund of the purchase price, while others offer a credit or an exchange. However, it is not technically considered a return when the original customer exchanges an item for another of the same kind and price (605-15-15-2).
Authoritative guidance is important for companies who offer their customers’ the right to return. This gives them insight and allows them to see when a transaction is considered a return. In some industries returns are not usually permissible. Real estate and service companies are examples. Products under warranty are also treated differently; if the good is defective it would not be treated as a return since it may require further performance by the seller and its warranty provisions (605-15-15-3).
Although sales with high rates of return can ultimately cause inventory to be misstated, returns are allowed because there may be dissatisfaction with the product. Different industries should be able to make different types of return policies.

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