General Motors is an American multinational corporation founded on September 16th, 1908 by William “Billy” Durant (GM, 2015, p. 1). Ever since this momentous event, General Motors has dedicated its time to supplying paying customers with affordable quality cars. General Motors owns different types of car dealerships that sell different models of car but all follow the same accounting principles. General Motors does follow the Revenue Recognition Principle when dealing with a cash or loan sale, in which they sell an automobile to a paying customer. They recognize the revenue made even if they are not in possession of the actual revenue. The Revenue Recognition Principle states that revenue is recorded at the time that it is earned regardless of whether cash or another type of asset has been exchanged (Larson, 2010, p. 32). This paper will first look at a cash sale transaction followed by a loan sale transaction when dealing with General Motors automobile industry.
The first transaction is referred to a Cash sale in the automobile industry where a client wishes to pay the price of the automobile in full, avoiding any additional expenses such as interest that would be accrued if payment would be charged on a monthly basis. When dealing with a cash sale from the General Motors automobile dealership, Cash is considered a Debit as expected, since it increases by the sale price of the automobile being sold. The inventory of General Motors would be decreasing by the equivalent cost of the automobile and therefore be credited. Additionally, the profit (sale price – cost) would be a debit if the sale price exceeded the cost, or a credit, if the cost exceeded the sale price. When dealing with Cash for General Motors, the cash that is debited is referred to as, “the amount of Cash received [from customer]” (General Motors, 2013, p. 11). In addition to this, the inventory is credited because the General Motors dealership has sold a car and has a decreased inventory of cars available for sale (General Motors, 2013, p. 21).
The second transaction in the automobile industry is referred to as the Loan sale. This transaction deals with a client who does not pay the full amount of the automobile at the initial sale, deciding to pay in monthly installments a fixed amount for a certain period of time. Now for this to be profitable for the car dealership, there is an interest charged with every month, to offset the deferred receipt of payment. When dealing with a Loan sale, the client usually pays the first month (referred to as the deposit) right before the acquisition of the automobile. This payment usually takes the form of cash that is immediately debited for the car dealership. Additionally, the remaining cost of the automobile is put into the General Journal as an Account Receivable (AR). The client will be paying monthly for the allotted amount of time for which it is due. The Accounts Receivable for the first month will be the initial sale price minus the deposit given to the dealership. In addition, every month when the client pays the car payment, this payment will be credited to the Accounts Receivable and due to the nature of this account, the client will also need to pay an interest payable to the car dealership. Similar to the Cash sale, the car dealership inventory is credited because they have sold an automobile, it will decrease by the cost of the car.
Although both transactions are different, the Revenue Recognition Principle can be applied to both of them. With this in mind, General Motors does in fact follows the Revenue Recognition Principle because revenue is recognized when the sale of a car is final. When dealing with the first transaction, the payment of the automobile is done in full at the purchase date. Since the automobile is paid in full, the car dealership accepts full payment and revenue is instantly recognized since there is no further money owed. When dealing with the second transaction, the Revenue Recognition Principle is also in effect because although the client is not paying the full cost immediately, since the additional payment is considered an Account Receivable, revenue is in fact being recognized, thereby following the Revenue Recognition Principle. Additionally, although not clearly mentioned in this principle, Debit and Credits must balance and in the first transaction, cash increases by the same amount that inventory decreases with addition of the profit that is made during this exchange. Debits and Credits also balance in the second transaction because as cash increases, inventory decreases, as Accounts Receivable decrease, Cash increases and finally, income is made through the interest of the note payable that the client owes and profit.
The Automobile industry and notably General Motors and their car dealerships, report and disclose information concerning these transactions in their financial statements. Since the price at which a car dealership will charge a customer for their car fluctuates based on the market, the most notable way of determining profit, specifically the two transactions that are explained and subsequently the profit that is produced, is to look at the General Motors 2014 income statement for which Total Revenue – Cost of Revenue = Gross Profit of $13,808,000,000 in the period ending 12/31/2014 (Nasdaq, 2015, p. 1). Also in this period, Sales (including General and Administrative sales) totaled $12,158,000,000 that is the total of all Cash and Loan transactions based on the sale of automobiles and general sales including warranties and additional parts. General Motors discloses the transactions that were mentioned before as the Total Revenue (the price at which all automobiles were sold) minus the Cost of Revenue (the cost of production and transportation of the automobiles) that is equal to the Gross Profit that is the profit made from selling the automobile to a customer (Nasdaq, 2015, p. 1).
In conclusion, the automobile industry does in fact conform to the Revenue Recognition Principle when selling automobiles to customers. They do follow this principle because they recognize the revenue on the day it is earned and not the day that it is fully paid. They do this because although they have not received the full amount owed, it is still considered revenue because they have given an automobile to the customer and therefore a transaction has occurred. Overall, the type of transaction, cash or loan, does not affect profit or revenue because the automotive industry will always end up being paid in full through interests charged to those who take loans or paid in full from those who pay everything up front.
Larson, K. (2010). Chapter 2: Financial Statements and Accounting Transactions. In Accounting (13th ed., Vol. 1, pp. 31-32). McGraw-Hill Ryerson Limited.
Motors, G. (2015). General Motors | History & Heritage - Creation | GM.com. Retrieved May 1, 2015, from http://www.gm.com/company/historyAndHeritage/creation.html
Motors, General. (2013). Accounting System Manual. In General Motors Dealer’s Standard Accounting System Manual (1st ed., Vol. 1, pp. 1-338). General Motors.
Nasdaq. GM Income Statement. (2015, May 1). Retrieved May 4, 2015, from http://www.nasdaq.com/symbol/gm/financials?query=income-statement