119
The Income Statement explains the changes in relevant and related balance sheet accounts between periods. If the traditional company must write off inventory due to spoilage or obsolescence how is this accounted for? The inventory account would be reduced by the amount of the write off and that makes sense. But Accounting is all about checks and balances, so every credit needs a debit. An expense charge would be created to reflect this write down. For those that want a greater understanding then this Investopedia article is quite useful and easy to follow (CLICK HERE). As that Investopedia article states, such expense charges are typically charged to Cost of Goods Sold and is therefore reflected in Gross Profit. That expense charge could be many fiscal periods after the inventory was bought.
What happens though if there is a surge in demand (or a supply shortage in the market) and the inventory sells for a much higher price than expected? There is no revenue recorded in advance and the higher sales price is recorded at time of sale and of course that appears on the income statement and is reflected in Gross Profit. Gross Profit
(or Gross Margin) is Sales (Revenue) less Cost of Goods Sold. Oftentimes, inventory is bought in one accounting period and sold in another. Very few companies buy all their inventory on day 1 of a fiscal quarter and have it all sold as final sale before day 90.
You can also think of companies that are awarded a multiyear contract. Revenue is booked (a portion as earned and a portion as unearned) and as time lapses is reconciled and recorded. There may be unexpected additional revenues or perhaps expenses/charges along the way.
Companies that follow IAS 41 record these estimated equivalencies in advance and make reconciling adjustments at the time of sale and beyond (returns, recalls, etc).