Internet and Drop-Ship Sales: Gross vs. Net Revenue Recognition
ASC 606 principal-versus-agent considerations, management reporting implications, and diligence questions for veterinary practices
Jim DeLano
Internet pharmacy and drop-ship programs can provide meaningful financial benefits to veterinary practices. However, the way these transactions are recorded can significantly affect reported revenue, cost of goods sold (COGS), and operating performance metrics.
Under ASC 606, determining whether a practice acts as a principal or an agent is an important consideration in deciding whether revenue should be recognized on a gross or net basis.
Understanding the distinction between accounting treatment and management reporting helps practice leaders accurately evaluate financial performance, compare operating ratios, and prepare for lender or acquisition due diligence.
Accounting Principle
ASC 606 principal-versus-agent guidance focuses on whether the entity controls the specified good or service before it is transferred to the customer. If the practice is the principal, gross revenue and related costs may be appropriate. If the practice is an agent, net revenue recognition may be appropriate, usually reflecting the fee, commission, or net amount to which the practice is entitled.
The indicators are evidence, not a voting system. Primary responsibility for fulfillment, inventory risk, and discretion in establishing price help inform the analysis, but no single indicator determines the conclusion.
Physical possession alone is not the test. Pricing discretion alone is not the test. Branding alone is not the test. The core question is what the practice promised, what it controlled before transfer, and what consideration it is entitled to receive.
Three Transaction Structures
Structure | What Typically Happens | Accounting Implication |
|---|---|---|
Practice sale with vendor fulfillment or drop-ship delivery | Client buys from the practice. The practice bills the client, records or collects the receivable, and owes the supplier or distributor. The supplier may ship directly to the client. | The practice may be principal even though it never physically handles the product. Gross revenue and related costs may be appropriate when the full facts support that conclusion. |
Third-party internet sale with gross cash flow | Gross customer proceeds actually flow through the practice, and product, fulfillment, processing, or platform charges are subsequently paid or deducted from the practice's accounts. | Record what actually occurred, then evaluate ASC 606 control. Actual gross deposits should not automatically be described as a manufactured gross-up. |
Third-party internet sale with net remittance | Provider supplies the storefront, manages inventory, fulfills and ships, collects customer payment, retains product and fulfillment amounts, and deposits only the practice's earnings. | Do not automatically manufacture gross revenue and COGS that never flowed through the practice. Perform and document the principal-versus agent analysis. |
Principal-Agent Evidence Matrix
The following matrix is a practical way to organize evidence for a typical net-remittance internet platform. It should not be used as a scorecard. The conclusion still turns on control of the specified product before transfer.
Evidence | Typical Practice Evidence | Typical Provider Evidence | Interpretive Note |
|---|---|---|---|
Controls or owns inventory | Generally no | Generally yes | Strong agent-leaning evidence for the practice |
Inventory risk | Generally no | Generally yes | Operational responsibility usually sites with the platform/provider |
Warehousing, fulfillment, and shipping | Generally no | Generally yes | Operational responsibility usually sits with the platform/provider. |
Customer payment processing | Generally no | Generally yes | Provider often collects client funds and deducts product/fulfillment costs. |
Pricing discretion | May set or adjust price, but often accepts provider- recommended pricing | May provide pricing structure or recommendations | Mixed evidence. Price discretion may indicate control, but it does not establish control by itself. |
Practice compensation | Receives residual profit, fee, commission, or net remittance | Retains product, fulfillment, and processing amounts | Agent-like economics when only the net amount is remitted. |
Branding and prescription authorization | Practice name may appear; veterinarian authorizes prescription | Provider may operate platform and fulfillment | Branding and prescription authorization are relevant facts, but they are not the same as controlling the merchandise. |
The Drop-Ship Counterexample
Drop-ship sales are important because they prevent the analysis from becoming too simplistic. A practice can be principal even when a third party ships the product. The issue is not whether the practice physically touched the product; the issue is whether the practice controlled the sale and had the related customer and supplier obligations.
Fact | Practice Sale / Drop-Ship | Net-Remittance Internet Platform |
|---|---|---|
Product shipped by | Manufacturer or distributor | Thir-party platform or provider |
Practice physically handles product | No | No |
Practice bills client and records A/R | Yes | Generally no |
Practice responsible for collection or credit risk | Yes | Generally no |
Practice pays supplier or bears product cost | Yes | Generally no |
Practice determines or controls the sale | Generally yes | Much less clear |
Likely ASC 606 posture | Principal-leaning when facts support control | Potentially agent-leaning when only net earnings are remitted |
FASB Example 45
ASC 606 Example 45 is useful because it addresses a marketplace-style arrangement: an entity operates a website, third-party suppliers provide and deliver the goods, and the website entity facilitates the transaction. The example focuses on whether the website entity controls the goods before transfer and concludes that the website entity is acting as an agent.
The example is an analytical benchmark, not an automatic answer for every veterinary platform. Its value is that it shows why a branded online sales channel does not, by itself, prove that the practice controls the goods being sold.
When Gross-Up Becomes Risky
There is a meaningful difference between recording actual gross cash flows and manufacturing gross revenue and COGS from a net remittance. If the practice receives only the net amount and does not incur the related product or fulfillment cost, adding estimated gross sales and estimated costs to the income statement can overstate both revenue and COGS while leaving profit dollars similar.
If material net-remittance activity has been recorded gross without support for principal treatment, an advisor or audit review may require correction. Depending on materiality and reporting use, prior financial statements could require adjustment or restatement. This is a reason to document the transaction facts and accounting rationale, not a reason to assign blame to the bookkeeper, CPA, or practice team.
Management risk: A gross-up can preserve the net dollar effect while changing the ratios leaders rely on: revenue growth, COGS percentage, gross margin percentage, labor percentage, EBITDA margin, pharmacy/product mix, and revenue per doctor.
Diligence And Consolidator Questions
Acquirers, lenders, and consolidators may ask whether online pharmacy, internet diet, and drop-ship activity is booked gross or net. The answer can affect perceived revenue scale, margin percentages, operating-ratio comparability, and adjusted EBITDA analysis.
A practical diligence question is: Is online pharmacy revenue booked net or gross? Net means only the practice's net earnings from the online store are recorded as revenue after product, fulfillment, platform, or processing amounts are retained by the provider. Gross means total online customer sales are recorded as revenue and related costs are recorded in the expense section.
The goal is not to make internet or drop-ship activity disappear. The goal is to show the activity transparently so a reviewer can understand total financial performance, actual economic contribution, and core hospital operating performance separately.
VizVet Management View
The accounting conclusion does not end the management analysis. Internet and drop-ship activity can be valuable and profitable while requiring less of the practice's physical infrastructure, inventory handling, staff time, and traditional service-delivery capacity.
VizVet's role is to make the management view visible. Leaders should be able to evaluate total performance, actual ancillary contribution, and core practice performance with internet and drop-ship activity included, excluded, or separately displayed.
View | What it Shows | Why it Matters |
|---|---|---|
Total reported view | All activity presented in the financial statements. | Shows the full accounting presentation used for financial review. |
Management contribution view | Core practice plus actual internet/drop-ship net earnings. | Shows the real economic benefit of ancillary activity. |
Core practice view | Hospital operating activity with ancillary internet/drop-ship contribution removed. | Shows the operating base used for staffing, productivity, benchmarking, and trend interpretation. |
Suggested Review Workflow
Identify each internet, online, ancillary product, diet, pharmacy, and drop-ship revenue source.
Document whether customer payments are collected by the practice or by a third-party platform.
Document whether the practice receives gross customer deposits, net remittances, fee income, commission income, rebates, or profit-share checks.
Document whether the practice actually pays product, fulfillment, platform, merchant, or shipping costs.
Review contract terms and actual transaction flow for principal-versus-agent treatment with the practice's accountant or advisor.
Record transactions based on the accounting conclusion and actual cash-flow mechanics.
Create management views showing how inclusion or exclusion changes COGS percentage, labor percentage, G&A percentage, EBITDA percentage, revenue growth, and contribution analysis.
Document the policy so future reporting, diligence requests, and annual reviews can be handled consistently.
Authoritative References
FASB Accounting Standards Update 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. Link: FASB ASU 2016-08 PDF
FASB ASC 606-10-55-36 through 55-40, Principal versus Agent implementation guidance. Link: FASB Accounting Standards Codification (after accepting terms, search or navigate to 606-10-55-36 through 606-10-55-40).
FASB ASC 606 Example 45, Arranging for the Provision of Goods or Services (Entity Is an Agent). Link: FASB Accounting Standards Codification (after accepting terms, search or navigate to 606-10-55-317 through 606-10-55-319, or search Example 45).
Deloitte DART interpretive reference, ASC 606 principal-versus-agent considerations. Link: Deloitte DART ASC 606 principal-versus-agent roadmap