When is a company a principal vs agent, and why does gross vs net revenue matter?

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AcadiFi · Accepted Answer

The principal vs agent determination hinges on who controls the specified good or service before transferring it to the customer. A principal controls the good/service and records gross revenue; an agent arranges for another party to provide it and records only the net commission. Indicators of principal status include: (1) primary responsibility for fulfillment, (2) inventory risk before and after transfer, and (3) discretion in setting prices. Example: Azulinea Travel lists airline tickets on its marketplace. It never takes title to the seat, Vuela Airlines sets fares, and Azulinea's responsibility is only to process the booking. On a $1,240 Tokyo-Paris ticket with a 9% commission, Azulinea records $111.60 of revenue, not $1,240. Compare with Harbor Retail, which purchases 500 wireless earbuds for $38 each and resells them at $79 — Harbor bears inventory risk and controls pricing, recording gross revenue of $39,500 and COGS of $19,000. Misclassification materially distorts revenue growth, gross margin, and EV/Sales multiples. Analysts should scrutinize platform businesses (food delivery, ride-hailing, marketplaces) where the distinction is often ambiguous.

When is a company a principal vs agent, and why does gross vs net revenue matter?

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