revenue recognition problem - please suggest

X sells stuff on internet. Get stuff from buyers, sells it keep 25% commission and pays net to buyer. In 2006 - X sells 2 mm; commission 500K How much revenue he should recognize: A. 500K B 2mm C 1.5 mm answer is A. can anyoner please explain - which concept is this question using?

You should use net revenue reporting, which is the difference between sales and COGS, as opposed to gross revenue reporting, which would be sales of 2mil and 1.5mil of expenses. To use gross revenue report, you must meet the following criteria: - Primary obligor under the contract - Bear Inventory risk - Bear Credit risk - Be able to choose supplier - Ability to establish price. Hope this helps.

Unless a company is primary obligor under the contract, bears inventory risk, credit risk, can chose the supplier and has reasonable latitude to establish price. They can not report gross revenue. Net Revenue: Net difference between their sales proceeds and their cost was equal to a sales commission. In this question, the company simply purchased the inventory from a supplier and sold it to a buyer, company does not bears any inventory risk or anything. Under US GAAP they have to report net revenue.