Journal Entry for Distribution of Goods as Free Samples
The distribution of goods as free samples is not uncommon among businesses. Free samples are often used as part of a company’s marketing and consumer outreach programs.
The major purposes of the distribution of goods as free samples include:
- Introducing a new product in the market
- Introducing an existing product in a new market
- Introducing a feature upgrade to an existing product
- Increasing the market share of a particular product
- Receiving feedback from product users
The outflow of merchandise that happens due to the distribution of free samples cannot be recorded as a sale. This is because no monetary compensation is received for the distribution of goods as free samples.
Instead, providing free samples to clients is viewed as an advertising expense. Therefore, it is debited to the advertisement expense account.
The journal entry for a free sample involves debiting the “advertisement (or free sample) account” and crediting the “purchases account.”
The above journal entry increases advertisement expense and reduces the purchase amount.
The Fine Trading Company aims to introduce new products to the local market. For marketing purposes, it distributes free samples costing $3,500 on 15 March 2016.
Required: Prepare a journal entry to record the distribution of goods as free samples.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.