Accounting for Promotional Giveaways
Promotional giveaways are the marketing expense in which company provides a free sample to the customer or public.
When the company launches new products into the market, they really want the customer to try their products. They expect the customer will test it and satisfy with it. As the result, they will become a loyal customer and come back to purchase more products.
The reality is different from the expectation. Customers will hesitate to try new products which they never use. It is hard to persuade them to try new things. So the company may create a new marking campaign by providing free products to the customers. The company expects the customers to use the sample and encourage them to purchase more.
The sample products that company giveaways can be the actual product that company sell or the special edition. It depends on the company and the nature of the products. Some have to make the sample edition to save some cost while sometimes it is unnecessary.
The promotional giveaways are recorded as the expense on the income statement of the company. It is part of the marketing expense that company spends to promote and acquire new customers. It will be recorded based on the occurrence of the promotional activities.
If the company uses its inventory to promote, they have to revere the inventory to promotional expense.
Journal Entry for Promotional Giveaways
When the company giveaways the product to the customers for free, they have to reverse the inventory from the balance sheet. It will be recorded as a promotional or advertising expense on the income statement.
The journal entry is debiting advertising expenses and credit inventory.
| Account | Debit | Credit |
|---|---|---|
| Advertising Expense | ### | |
| Inventory | ### |
The entry will reduce the amount of inventory as the company already give them to the customers. At the same time, they have to record the expense as the products are provided free of charge to the customers.
Example
ABC is a shampoo company which just join the market a few months ago. In order to persuade customers to try their products, they decide to run promotional giveaways during a festival. During the month, the company has giveaways the product cost $ 5,000. It is the same products that company sells to the market. Please prepare accounting records for the promotional giveaways.
The company has used the product to run marketing campaigns and giveaways to customers. So they have to reverse the inventory from the balance sheet and record advertising expenses.
The journal entry is debiting advertising expense $ 5,000 and credit inventory $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Advertising Expense | 5,000 | |
| Inventory | 5,000 |
The entry will increase advertising expenses $ 5,000 and reduce inventory by the same amount.
Advantages of Promotional Giveaways
- Increase sales: The promotion will increase the sale as the customers are hooked on the product. With the high quality, the customers will come back and purchase more after trying the promotional items.
- Increase customer awareness: The promotion will increase customer awareness of our product in the market. It will increase the likelihood of purchase when customers heard about the product next time.
- To receive customer feedback: It is the time that company receives the actual feedback from the customers.