Goods distributed as free sample journal entry

Does a free sample journal entry sound interesting?

Let’s understand this with real-time examples.

Do you remember receiving some freebies when purchasing a product?

For example, you noted a buy 1 get one offer for a Perfume.

Here, the Second Perfume is a free sample.

Such goods distributed are a kind of advertising charge.

Accounting Corner

Let’s see how to record such goods distributed as free sample journal entries.

The GL Accounts Goods and Advertising Charges are part of this free sample distribution journal entry.

Its general practice is to record the Inventory/Goods Procurement and Sales to the Purchase Account and Sales Account, respectively.

So, there will not be any Goods Account as of such.

We can’t count the free sample distribution as a Sale, which will result in an inappropriate increase in the revenue balance.

Instead of recording it in the Sales Account, we will record this transaction by crediting the purchase as the goods go out.

If goods are distributed as free samples, they will not be available for production or resale.

Therefore, reducing the purchase account is appropriate by crediting it to this free sample journal entry.

Goods distributed as free sample journal entry is a promotional expense to the business. 

The amount spent on marketing is increasing every year. Business entities are finding innovative ways to market their products. To understand the increase in spend, refer to this article on digital ad spend.

What’s the entry to record the Procurement of goods?

Procurement of goods involves purchases and vendor payables or Sundry creditors. Purchases are Expenses, and Sundry Creditors are Liability.

Per Modern Rules of Accounting, 

For Asset and Expense General Ledger (GL) accounts, we need to debit those ledger accounts to increase its balance. Conversely, to enhance the balance of Liability or Income GL accounts, it is imperative to record them as credit in a Journal entry.

Goods distributed as free sample journal entry

We will learn to record the Goods distributed as free sample entries with an example. Assume that Spoil Company received 100 No’s of Smart Phones Costing $1,000 each. The Company is in the business of resale of Smart Phones. The Company wants to promote its business by organizing a game show where the winners get a smartphone. There will be five winners.

Therefore, the Company spent $5,000 promoting its business to boost its presence. We need to record the Advertising Promotion Charges in the books of accounts by reducing the purchases and increasing the advertising charges. 

Runners Insight

Before recording the advertising charges, we need to understand the impact of such promotion charges. A business expense will impact more than one financial period. If the expenses relate to more than one financial period, we need to prorate the expenses over the applicable period

Different Accounting Treatment

Sometimes, businesses warrant spending hefty marketing dollars on free samples. However, if the finances are recorded as expenses, the income statement might be distorted. So, there is a different way of handling such transactions.

Such promotional spending is recognized as a fictitious asset for the purpose of accounting and amortizing a portion over its expected useful life. This concept is similar to deferred revenue expenditure.

FAQs for Goods distributed as free sample journal entry

Which account is debited when goods are distributed as free samples?

Free Sample distribution results in moving stock of goods from the entity factory or down, which increases the entity’s visibility, like an advertisement. So, we will debit the advertisement charges when there is a free sample distribution.

What type of account is goods distributed as free samples?

The goods can be primary stock or any other items. For example, an entity selling Laptops runs a lucky draw campaign to promote its products and business. 

An entity might also distribute free t-shirts with printed business names. 

Also, read Goods given as charity Journal entry.

How is the Goods distributed as free sample journal entry considered in books?

Such distribution of goods as free samples is a business or product promotion expense. So, we need to treat them as Advertisement Charges or Marketing Expenses.

What account will be credited if goods are given as a free sample

Yes, we need to credit the purchases to record the free sample distribution. Providing free samples reduces the entity’s stock in hand, so we will reduce the purchases already made.

How do you record free goods in accounting?

Free goods are a business promotion expense. So, we will debit the advertisement charges and credit the purchase account.

What is the journal entry for the rent paid?

Record the Journal entry for rent by debiting the rent expenses and crediting the bank account. Refer to rent paid article for more insights.

Is the free distribution of goods debited to the trading account?

The main reason for goods distribution as free samples is to ensure the entity products have a broad reach. So, it’s like Sales Marketing or Advertisement expenses. As such, it is not part of trading activity. But we need to record it in the statement of profit or loss.

What is the journal entry of goods lost by fire?

Goods lost by fire will also reduce purchases and business losses. So, we will debit the Loss and credit the purchases.

How do you write off a product sample?

Writing off a product sample means providing the goods for promoting it. So, it’s a promotion expense, and we will debit it with a corresponding credit to the purchases. 

Key takeaways for Goods distributed as free sample journal entry

Goods are given as free samples to ensure the product and business are more reachable to the customers. So, it is an advertisement expense.  We will debit the advertisement account and credit the purchases to reduce the stock distributed as a free sample