What should a company do when sales are made with a right of return?

When sales are made with a right of return, the best practice involves estimating potential returns and appropriately accounting for them. Recording the returned asset in a separate inventory account helps the company keep track of items that may come back, reflecting the company’s true inventory levels. It ensures that financial statements present a more accurate picture of both inventory and potential revenue.

By not recognizing any revenue or recognizing the full sales price without considering the likelihood of returns, the financial statements could present a distorted view of the company's current financial position. Estimating returns also involves adjusting the revenue figures to reflect only those sales expected to be finalized, providing a clearer picture of actual revenue. Thus, maintaining a separate inventory account for anticipated returns allows the company to manage its assets more effectively while adhering to accounting principles related to revenue recognition.