How to Calculate the Cost of Recovery Methods

The cost of recovery method is how to account for revenue that does not recognize any profit until the cost of the merchandise is recovered. Under this accounting method, once the cost is recovered, any remaining payments are accounted for as gross profits. The cost of recovery method is generally not recognized as an accepted accounting practice. Calculate the cost of recovery by considering the cost of goods sold for a product and the subsequent streams of revenue for payment of the product.

Step 1

Calculate the cost of a product that you sold. For example, assume the cost of a machine sold by your business was $10,000. Typically reviewing the invoices and purchase orders for a product will help you calculate costs.

Step 2

Add the flow of revenues or payments that result from the sold product. For example, assume the company that bought the machine paid $7,500 in January upon delivery of the machine, $2,500 in February, $2,500 in March and $2,500 in April. The total paid for the machine is therefore $15,000.

Step 3

Subtract the revenue figure from the cost of the product in Step 1. Continuing the same example, $15,000 - $10,000 = $5,000. This figure represents the profit you've made using the cost of recovery method.

Step 4

Record the product sale in the company's balance sheet using the cost of recovery method. Continuing the same example, in January, you would record the $7,500 payment as the "cost of good sold" on the balance sheet. In February, you would record the $2,500 payment as "cost of goods sold" on the balance sheet. In March and April you would record profit of $2,500 per month on the balance sheet since the cost of the machine was already recovered in previous months.