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ABC Technology Company have been detected to be violated with the revenue recognition principle by channel stuffing. A...

ABC Technology Company have been detected to be violated with the revenue recognition principle by channel stuffing. Assuming that ABC recognized revenue when goods were shiped, how could it have properly accounted for the fact that customers had a right to cancel the contracts (make an anology with accounting for bad debts)?
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Answer #1
  1. In the normal business practices, revenue should be recognised when the ownership in goods is transferred to the buyer.
  2. ABC company inflated its revenue by recognising the revenue when goods are shipped.
  3. The proper treatment of accounting is that, usually revenue should be recognised when goods reach the customers place, however it may also be recognised when goods are shipped if the terms of agreement specify so.
  4. These kind of treatment by ABC Technology company would result in loss of revenue consequently because customer may cancel the contract when the goods are still in transit leading to baddebts which is a bad sign for a business.
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