One of our suppliers is directly selling products to our customers. We have been asked to generate orders, and the bills will be sent to us first. After we pay, the customers will then pay us. This transaction does not include any markup. I plan to recognize sales revenue accordingly, but someone has asked me to offset the revenue account with an expense recognition. Ultimately, our books will recognize no expenses and will show a total sales amount of zero for this transaction. I believe this approach is wrong in every respect. Can anyone confirm my view, or point me to a place where I can find evidence to prove whether this practice is acceptable or not? Thank you for your time and thoughts.

Core Issue: Principal vs. Agent

Under accounting standards (such as ASC 606 or IFRS 15), the key to revenue recognition is determining whether the entity is acting as a principal or an agent. If the entity is only an agent, revenue should be recognized on a net basis (i.e., only the commission or fee), not on a gross basis. In this case, the supplier sells directly to the customer, and we only generate orders and collect and pay on behalf, with no markup, which may indicate that we are only providing agency services.

Gross Method vs. Net Method

If we are required to recognize the full sales amount as revenue and simultaneously recognize an equal amount of expenses, resulting in a net of zero, this is essentially a "zero-margin" treatment under the gross method. However, if we are not the principal, we should not recognize gross revenue, but only the agency fee (which is zero here). Therefore, offsetting revenue and expenses to zero may blur the line between the gross and net methods and does not align with the substance of revenue recognition.

Potential Risks

  • The financial statements may mislead users because total sales are overstated and expenses are understated, despite the net being zero.
  • Tax filings may have unintended effects, such as turnover taxes (e.g., VAT) being calculated on the gross amount, leading to additional tax burdens.
  • From an internal control perspective, this treatment may obscure the true nature of the transaction and increase audit risk.

Recommended Actions

It is recommended that you review the applicable accounting standards (such as ASC 606-10-55-36 to 55-40, or IFRS 15.B34-B38) to determine whether you are a principal or an agent. Additionally, consult your company's auditors or professional accounting advisors for specific guidance. If it is confirmed that we are only an agent, then gross revenue should not be recognized; only the net amount (which is zero here) should be recognized, but the agency relationship should be disclosed in the notes.

"Revenue recognition should reflect the substance of the transfer of goods or services to the customer, not merely the contractual form." — IFRS 15

In summary, your concerns may be valid, but they need to be assessed based on specific facts and standards. It is recommended to gather evidence such as contract terms and the relationship between the supplier and customers to support the correct accounting treatment.