Expert: Ed McFarland - 6/21/2004

Question
Hi Ed,

Thanks so much for offering your expertise in this forum, it is very much appreciated!

My family owns a bridal boutique in the San Francisco Bay Area and I am in the process of writing a business plan (for much needed potential loan/investment) I am struggling with an accounting concept and am hoping you could help.

I understand that A/R is when your customers buys on credit, payable to the company at a later date.  In our situation, the majority of our business is done on special orders. The customer will place a 50% deposit, we will order the item which generally takes between 1 and 4 months to arrive.  Once the item comes in, we notify the customer and they pay and pick it up (usu. w/in about 1 to 4 weeks).

Since the item has never left the store, the customer has not technically purchased on credit and this is not technically AR.  I guess this would be considered a pre-payment on their purchase? But the sale should be registered at the time the sale is made for tax/IRS purposes from what I understand, is this correct?

For my business plan/financials purposes, I am confused on how to deal with this. I would like to reflect the cash flow accurately of deposits coming in of a sale made and the balance being paid in 3-4 months so AR is the only way I can think of to show this but is this accurate?  Also, it seems wrong since the inventory is not depleted at the time of the sale, in fact a PO is created and when the new inventory arrives it is automatically given to the customer.  

I hope this makes sense, could you help with my confusion?

Thanks so much!

Sofia


Answer
First the order for a dress comes in, $1,000. The customer has signed a sales contract for the balance to be paid on delivery.

You have your sale for $1000. You collect $500 for the deposit, that's a liabilty and record the a/r for balance.

When the customer comes in and pays the balance, the a/r is cleared and the deposit is credited.

Hope this helps Sofia.