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Book publishing publishers sell books to stores
and they return unsold texts for full credit.
The rate of returns can exceed 30% of sales.
Thus a sale is not really a sale.
Accounting standards (SFAS 48 and SFAS 5)
state that estimated losses from contingencies
(returns) shall be accrued against income,
thus reducing income and accounts receivable.
All major publishers maintain a reserve for
returns. For example:
John Wiley's 1999 Annual Report:
Sales Returns and Doubtful Accounts: The
Company provides an estimated allowance for
doubtful accounts and for future returns on
sales made during the year. The allowance
for doubtful accounts and returns (estimated
returns net of inventory and royalty costs)
is shown as a reduction of receivables in
the accompanying consolidated balance sheets
and amounted to $41.8 and $41.6 million at
April 30, 1999 and 1998, respectively.
How do you calculate the reserve?
Look at the rate of return on similar sales
that you incurred in the past. Similar sales?
For most book publishers this means calculating
returns on sales to resellers and consumers
separately. You make this two part calculation
because resellers return more than consumers
(15% to 40% vs. <1%).
Tax Implications & Software Tip
The IRS Code normally does not allow you
to claim a deduction for expected future returns.
Thus you pay taxes on income you may not receive.
There is one exception to this rule.
Under Section 458 of the IRS code you can
claim a deduction for paperback returns received
in the first 4 1/2 months of the following
year. Publishers intent on minimizing their
tax liability should be careful to track sales
& returns by binding: hardcover and paperback.
This provision is elective and "the
election is made by filing a statement with
the income tax return for the first taxable
year for which the election is to apply."
- Accounting and Finance for Magazine (&
Book) Publishers by Peter M. Craig
Software Tip: To take advantage
of this deduction you should make sure that
your software can track sales by binding -
ie paperback.
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