Sales Cancellations getting deducted from Gross Revenue?

Question

I'm trying to figure out how a sales cancellation would be deducted from the gross revenue portion of the P&L. If we took a deposit from a customer on a contract and then refunded said deposit, that makes sense to me. If we did refund the deposit thought the total contract value should not be removed from gross revenue only the deposit amount.

Shouldn't the only amount deducted from a gross revenue actually be money collected and refunded??

Answer 1

I would suggest that a prudent firm would have a charge against Revenue when first booking revenue, creating a balance sheet item for contract cancellation. Thus, initial revenue recognized would be lower. When a contract cancels, the balance sheet fund is affected, but not current revenue.

Alternatively, if there are deposits made on the contract, which are subject to refund, one might want not to recognize that revenue until it is fully earned.