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The risk associated with collecting cash from the receivables is known as credit risk. This risk reflects the loss that will be incurred when the borrower cannot repay the amount borrowed.

Using the gross method of reporting revenue, the business entity must recognize revenue of $2,000,000.

A business entity using the net method must report $1,700,000 .

$\left(\$2,000,000-\$300,000\right)$

The revenue from the sales that are subjected to reversal might create a constraint in revenue recognition. Therefore, the companies will recognize revenue in two situations:

1. When the company has experience of a similar contract and can determine the amount of return or variable consideration.
2. When the company has previous experience not reversing the recognized revenue.

The business entity must recognize revenue for products with the right to return as follows:

1. The business entity must recognize the revenue equal to the amount the business entity is assured of collecting from the customer.
2. Setting up liability and asset account for reporting the right to recover product from the customer.

Collectibilityis the credit risk associated with the customer to whom sales are made on credit. The business entity does not recognize the revenue after adjusting the customer’s credit risk. Instead, the business entity creates a provision account at year-end and reports it as operating expenses in the income statement.

If there exists doubt regarding the collection of amounts from the customer, then it can be said that parties to the contract are not committed to their obligations.