Help please on promotional expense

[normalstudent99]

Hello dear members,

I have some questions. So, for a company that uses credit or e-cash as their payment (meaning you pay dollar then that dollar will be converted into e-cash) how would you treat promotional expense that uses no actual money but uses e-cash instead??
Let'say that the company is giving 10$ for free for every 10$ e-cash top up. How would we make it into a journal entry??
Db: promotional expense/ sales discount
cr: revenue??

or

db: revenue $20
cr: sales promotion/sales disc (then it will be minus)

thankyou.

 

[Steve-LevelUp]

I'm not sure I understand what ecash means. Is this essentially giving the customer a gift card that they can claim in your own store?

 

[normalstudent99]

Hello stevenlevelup,

The e-cash I mean here is like a digital currency in your account (e.g: grabpay). I don't know how to put this promotional expense and giveaway into journal entries because there's no real money flow out.

 

[Steve-LevelUp]

So, it is not like a gift card. but rather something that they can use in their account. Where can they use this digital currency, through your store only, or anywhere?

 

[normalstudent99]

Hello steve-levelup,

This digital currency can only be used in my store.

Thankyou.

 

[Steve-LevelUp]

So it is basically a gift card, just an electronic one.

Presuming that there is no specific way to track how it is redeemed and that the gift doesn't expire, then you would need to record the full amount as an immediate promotion expense. Ideally, you would want to be able to track this specifically, as if this is a significant expense, it might artificially increase revenues by the equivalent of the expense. But, if there is no way to do this, then I think this is the only alternative.

 

[normalstudent99]

Hello steve-levelup,

It can be redeemed in my store whenever customer uses my store's services (my store is a rental store).
Based on your explanation, then promotional expense will be debited.
Then, what should I credit?? cash? but there's no real money going out.
Thank you.

 

[Steve-LevelUp]

You would credit the customer account, which would be a liability. If a customer adds $100 to their account now ( in cash) what happens? Do you just record the cash as revenue, or do you hold it as a liability?

 

[normalstudent99]

Hello steve-levelup,

I'm using cash basis accounting. So, that $100 will be recorded as revenue. Is that wrong??

 

[Steve-LevelUp]

Cash based accounting doesn't convert well to this, but presuming your customers would immediately take advantage of the program then you wouldn't book anything at first.

As sales are booked, no cash is received, so you have outbound inventory, but no incoming cash, so this would be where you would book your promotion expense, reducing inventory. However, i'm not as familiar with cash accounting in a situation like this.

 

[normalstudent99]

Hello steve-levelup,

Reducing inventory is a great idea. My store works in a hospitality industry (no physical goods). Will it still work in this case??

Thankyou.

 

[Steve-LevelUp]

So, you are a cash based, have no inventory, so you are essentially offering free services for goodwill purposes. There would then be no entry.

 

[normalstudent99]

Hello Steve-levelup,

That is what my friend suggested also. No entries. But, what about the costs associated with that free promotional service? I'm giving $10 worth of free ride for my cars. Don't we need to take these into account??

Thankyou.

 

[Steve-LevelUp]

Its no different than just giving a discount. a $10 reduction off your price would just reduce your revenue. As you use cash based accounting, and are unable to track when this is redeemed, there is no other entry.

 

[normalstudent99]

Hello Steve-levelup,

First I'm thinking to make the entries like this when I give away $10 for free (Customer doesn't have to pay anything) :

Db : Sales Promotion Expense $10
Cr : Revenue $10

and when they pay $10 they get another $10 for free. So, I made the entries like this:
Db: Sales Promotion Expense $10
Cash $10
Cr : Revenue $20

What do you think??

Thankyou.

 

[Steve-LevelUp]

the problem with this is that you are creating revenues that don't really exist. By doing it in this manner, you are booking revenues of $30 (total), but you have only actually collected $10.

In the extreme, if you revenues were $3,000,000 (under this approach) you would then have $2,000,000 in promotion expense. You didn't really make $3m, nor did the promotion expense actually cost you $2m, so this is not the appropriate entry.

Another example would be if a consultant decided to waive a customer 3 hours of billable time. This customer wouldn't then book this 3 hours to promotional expense or some other category, it just wouldn't be billed.

So, in this case, as you are just doing it as a promotion, it doesn't actually cost you anything other than delivering the services that a customer might claim with their $10. The cost to deliver would actually be fractional to the $10 and probably not worth separating.

If you are able to track the redemption of these promotional $10 items, then you could allocate the costs of delivering the services for this form your other relevant expenses to promotional expenses.

Overall though, you are just giving away service the for free to the customer, so there is no need to book anything.

 

[normalstudent99]

Hello Steve-levelup,

Thankyou very much for your help. I'll take your advice.