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Thereareseveral accounting factors that need to be considered in thismarketing campaign by Runway Discount that will determine whether thetransactions involved will be recognised in the books of account asreduction of revenue transactions or marketing expenses. The firstfactor will be whether the incentive is a reduction in the price ofthe commodities or services that are rendered by the company in whichcase the transaction will be recognized as one that affects revenue.The other factor will be whether the company incurs any cost inimplementing this campaign. If such costs are there then the wholetransaction will be treated as a marketing expense. Note that cashconsiderations are always treated as reductions to the revenue of thecompany therefore, making them revenue transactions unless the cashconsideration is in exchange for a benefit that the vendor isreceiving and the fair value of this benefit can be determined orreasonably determined given the conditions that were preset.
Giventhis explanation, the transaction shall be recognized in thefinancial records of Runway Discount as an expense because the twentyfive dollars represents the expense that would be incurred if theywere to use any other marketing procedures such as using a marketingfirm to advertise for their product.
TheF.A.S.B (Financial Standards Board) accounting standardscodification provides that the transaction is recorded at the datewhich revenue is recognised by the vendor (605-50-25-3) or at thedate which the incentive was offered1.In this case however, the transaction will be recognized when RunwayDiscount receives revenue from the new customer that was referred bythe old customer. The company accounts that are affected by thistransaction include: the marketing expense account, customer account,sales account and cash acount if the transaction is recognised as anexpense. When the referral credit is earned by the customer, thefollowing entries are made first of all, you create the customer’saccount which will be credited with the amount that is the referralcredit. The double entry for this is debiting the marketing expensepayable account. At the end of the accounting period, the balance ofthe marketing expense will be taken to the income statement and bededucted from gross income to find the net income. When the credit isredeemed against a one hundred dollars purchase, the company willrecord sales of seventy five dollars by crediting the sales account.In the cash account, a debit entry of a hundred dollars will be madeand a credit entry of twenty five dollars will be made to balance tobalance off the sales account and close the market expense account tothe income statement. The market expense payable account is creditedand the marketing expense account is debited with the amount ofseventy five dollars, i.e
Whenthe referral is earned,
Dr:Marketing expense 25$
Cr:Referral fees payable
Dr:Referral fees payable account 25$
Dr:Cash account 75$
Thecompany incentives in coming up with this campaign was to attractmore customers and also to keep the existing customers loyal to theorganization. The incentive is not tied to any other purchases thathad occurred initially or any other prior conditions.
Thereare different views on the treatment of such incentives by differentbodies. The securities exchange commission proposes that thetransaction should be recognized as a cost of sales to the company.This would mean that it is recognized as a revenue. The accountingstandards codification on the other hand guides that the transactionbe recognized as an expense provided the two conditions mentioned inthe first paragraph are met.
Inmy opinion, it would be better if the transaction was recognized as arevenue transaction as proposed by the securities exchangecommission. This is because the transaction has a greater effect onrevenue and it is easier to understand and interpret for the purposesof financial records analysis.
Financial Standards Board: Standards Codification. (605-50-45-1), 2014.
1 Financial Standards Board: Standards Codification. (605-50-45-1), 2014.