How Try Before You Buy works
Shoppers check out with the Try Before You Buy option on products.
When the order is placed, an authorization is placed on the shopper's card for the TryNow order.
The merchant ships inventory to the shopper, just like a typical order.
The shopper tries items at home and decides what they would like to keep or return.
After any returns are accepted, the shopper's card is charged only for the items kept. This charge occurs after the trial.
Please find some basic guidelines below, but note that you should consult your accounting team to make the final determination of how to implement all accounting policies and procedures.
For cash-based accounting
TryNow orders defer cash collection until the trial has finalized and the shopper has returned any items they choose not to keep. This means that you will not recognize revenue or cash until several days after the order is placed. Once the trial period is finalized (this amount of time can vary based on fulfillment, shipping, the trial period you set, and the return shipping and processing time), TryNow will automatically capture the authorization on the shopper's card for the correct net amount. At this time, you should also recognize this amount as cash and as revenue.
For accrual-based accounting
Because the order happens in advance of cash collection, you will need to accrue for both your revenue and the possibility of returns before cash is collected from customers. This can be done in a few steps:
Recognize Revenue
Revenue for TryNow orders should be recognized at the same point you recognize revenue from standard orders (generally, when it is shipped or when it is received by the customer).
Debit "Accounts Receivable" (asset account) to record the amount owed by the customer.
Credit "Sales" (revenue account) for the full amount of the sale.
Account for changes in inventory as you normally would.
Add to the Return Reserve
Debit "Allowance for Sales Returns" (contra-revenue account) for the estimated returns amount to reduce revenue.
Credit "Sales Returns Reserve" (liability account) for the estimated returns amount to account for the liability.
Record Actual Returns
When customers return products, debit "Sales Returns Reserve" and credit "Accounts Receivable" to adjust the reserve and reduce the amount owed by the customer.
Collect Cash
When the trial ends and you charge the customer's card for the net value of the order, recognize cash collected by debiting Cash (asset account) to reflect the cash collected.
Credit Accounts Receivable to reflect the reduction in the amount owed by the customer.
Don't forget to periodically review the accuracy of the return reserve by comparing actual returns to the estimated returns, and adjust the Sales Returns Reserve as necessary.