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Group 6 - Principal & Agent Relationship

The document defines the principal-agent relationship as an arrangement where one entity legally appoints another to act on its behalf. A principal's role is to provide goods or services itself and record revenue as the total sales price. An agent's role is to arrange for another party to provide goods or services and only records revenue as the commission it receives. The document provides examples of a company operating as an agent by facilitating sales and receiving a commission, as well as a company operating as a principal by purchasing and installing CCTV systems for customers.

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32 views9 pages

Group 6 - Principal & Agent Relationship

The document defines the principal-agent relationship as an arrangement where one entity legally appoints another to act on its behalf. A principal's role is to provide goods or services itself and record revenue as the total sales price. An agent's role is to arrange for another party to provide goods or services and only records revenue as the commission it receives. The document provides examples of a company operating as an agent by facilitating sales and receiving a commission, as well as a company operating as a principal by purchasing and installing CCTV systems for customers.

Uploaded by

walsondev
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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PRINCIPAL AND

AGENT
RELATIONSHIP
ALIBANGBANG, BULADO, BAMBALAN, DE LARA, LAMIGAN
Definition
The principal-agent relationship is
an arrangement in which one entity
legally appoints another to act on
its behalf.
A common principal-agent
relationship involves consignment.
An entity must decide if the nature of
a performance obligation is:

PRINCIPAL – to AGENT – to arrange


provide specified goods or for another party to provide
services itself. the goods or services.
If the entity is PRINCIPAL, it records revenue equal to the total
sales price paid by the customers as well as cost of goods sold equal
to the cost of item to the company.
 A principal’s performance obligation is to deliver goods and services.
 The seller is viewed as a principal if it obtains control of the goods or
services before they are transferred to the customer.

If the entity is AGENT, it records revenue only in the commission it


receives in the transaction.
Agent act as a facilitator that receives revenue based on the
fee or commission for helping sellers provide goods and
services to buyers.
Agent’s performance obligation is to facilitate a
transaction between a principal and a customer to provide
goods or services.
Indicators that an entity is an AGENT:
Another party is responsible for fulfilling
the contract;
The entity does not have inventory risk;
The entity does not have discretion in
establishing prices for the other party’s
goods or services;
The consideration is in the form of a
commission; and
The entity is not exposed to credit risk.
Chopee Co. operates a website that
enables customers to purchase goods from
a range of suppliers who deliver the goods
directly to the customers. When a good is
purchased via the website, Chopee is
entitled to a 10% commission based on
the sales price. Chopee’s website
facilitates payment between the supplier
and the customer at the price set by the
supplier. Chopee has no further obligation
to the customer after arranging a sale.
X. Co. installs CCTV for customers. X Co. does not maintain

inventory of CCTVs. Instead, when a customer contracts X Co., X

Co. purchases the CCTV from a supplier and installs it at the

customer’s premises. X. Co chooses the supplier; however, the

CCTV purchased must meet the customer’s specifications, otherwise

the customer can reject it. Therefore, X Co’s profit is based on the

difference between the contract price and the purchase price of the

CCTV less the labor and other materials and overheads relating to

the installation. Half of the contract price is due upon signing of

contract and the balance is due after installation is complete. In case

of factory defects, the customer can seek remedy from the supplier

under the supplier’s warranty. However, X Co, is responsible for any

faults relating to the configuration and installation of the CCTV.


KEY TAKEAWAYS:
 The principal-agent relationship refers to an
agreement where one party designates another to
act on its behalf and in their best interest.
 Distinction between a principal and an agent is
important because it affects the amount of simple information
revenue that a company can record.
 Principal – controls the good or service before it
is transferred to customer; revenue = gross
consideration.
 Agent – arranges for other party to provide goods
or services; revenue = fee and/or commission.

Me, a master in overthinking.

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