Goods distributed as free samples are products given away by a business usually for promotional reasons.
The goods distributed as free samples do not have a sales value and therefore cannot be recorded in the accounting records as sales.
The free product samples do however have a cost which needs to be removed from the cost of sales account and recorded as an expense. The expense account used will depend on the reason the goods were distributed as free samples and might include for example sales and marketing, promotion, advertising, charity or simply a free samples expense account.
Goods Distributed as Free Samples Example
Suppose a business gives away free samples costing 1,500 to customers in order to promote a new product range it is launching.
The accounting records will show the following bookkeeping entries to reflect the goods distributed as free samples journal.
Goods Distributed as Free Samples Journal Entry Explained
The debit entry represents the cost of the free product samples to the business. In this case the amount is treated as a promotional expense as the samples were given to customers to promote a new product.
In this example it is assumed that the business operates a periodic inventory system so the credit entry reduces the purchases expense which in turn removes the cost of the samples from the cost of sales account.
It should be noted that in a perpetual inventory system the credit entry would be direct to the inventory account.
The Accounting Equation
The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each transaction.
The accounting equation for the goods distributed as free samples transaction is shown in the following table.
|None||=||None||+||Purchases – Expense|
|0||=||0||+||1,500 – 1,500|
In this example purchases has decreased by 1,500 which increases net income, retained earnings and equity, and promotional expenses have increased by 1,500 which decreases net income, retained earnings and equity. The net effect on equity of the two entries zero.
The transaction is simply a reallocation of the cost of the products distributed as free samples from cost of sales (purchases) to promotional expenses.
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