Journal entry for distribution of goods as free samples
The distribution of goods as free samples is not uncommon among businesses. It is a part of overall marketing efforts of a business. The major purposes of such distribution include:
- introducing a new product in the market.
- introducing an existing product in a new market.
- introducing a feature upgrade in an existing product.
- Increasing the market share of a particular product.
- getting feedback from product users.
The outflow of merchandise as a result of distribution of free sample cannot be recorded as a sale because no consideration is received for such a distribution. It is an advertisement expenses and is, therefore, debited to “advertisement expense account”.
The journal entry for free sampling is to debit “advertisement (or free sample) account” and credit “purchases account”.
The above journal entry increases the amount of advertisement expense and reduces the amount of purchases.
The Fine Trading Company wants to introduce some new products in the local market. For this purpose, it distributes goods costing $3,500 as free sample on March 15, 2016.
Required: Prepare a journal entry to record the distribution of goods as free sample.