I have a client who purchased items to be sold.  They've already paid for them in full, but they ended up giving away several items as a promotion.   They want me to account for the money they have lost by not selling these items to an expense account.   However, what account would be used to offset that entry since nothing actually went through the bank.    They just want to record what they didn't sell as an expense. 

For your info, inventory is not tracked on Simply so I cannot adjust any inventory accounts.

 Hi there:  If you have an amount to assign to the items, and the debit for the purchase of the items went to a "Purchases" account for example, then your entry would be a credit to the Purchases account and a debit to the Advertising & Promotion account.     Rita Deering

 It's actually a little more complicated then that.   Without naming the company I'll try to explain it with an example.

Company orders 500 chocolate bars (no payment is made up front).

The bars sell for $5 each.   Of that, $4 gets paid to the 'parent company' up the ladder.  The remaining $1 is profit.

They have sold 480 of the bars to date and the funds have been debited to the bank and credited to a deferred chocolate bar account (under the current liability section of accounts).

The company has paid $2000 to the parent with the payment debiting the deferred account and credit to bank.  The company has given away the other 50 bars as a promotion, but they want to claim that $100 loss they get for the unsold bars.

So at the moment, the deferred cookie account shows a balance of $400 (the profit of the bars sold).   

Final entries are then done as follows to move figures to revenue and expense accounts:

debit deferred account $400 (balance of deferred account)

debit expense account $2000 (payment to parent company)

credit revenue accout $2400 (total money collected)

So for the company to calculate their profit, they would just compare the revenue and expense account and the difference would be their profit.

How can I now show the $100 loss in revenue for the unsold 20 bars without reducing the revenue they already collected?

Hope this made sense!

I would be careful with that one because the PST people do not care if the goods were given away for free.  They still want the tax that was collectible on those items (at least on the cost amount).

 There is no PST involved.  The items are sold as fundraising for a non-profit.   They just want to somehow capture how many of the items (as a $ value) were used as promotional.

I know what account I would debit (PR account), but don't know which to credit since no actual money is involved.   

The revenue account shows what they have made for the items they actually sold, so if I reduce that it would throw that out of balance.

Any help would be appreciated.

 Can anyone help?

 Hi there:  In your example you say the company bought 500 bars.  You say they sold 480 bars.  But you also say that they gave away 50 bars.  That doesn't add up.  Also, the profit on selling 480 bars would be $480.00, not $400.00.  You also said that you want to claim the $100.00 lost profit but if 50 bars were given away, the lost profit would only be $50.00, not $100.00.    Please clarify all the numbers and then we might be able to figure out what to do.    Rita Deering

 ooops....sorry Rita.  I changed one of the numbers during my typing (from 50 promo to 20) and forgot to update the figures elsewhere.

The did not pay the bars up front.   They ordered 500.   Sold 480 @ $5 each for revenue of $2400.  They pay $2000 to their 'head office' for the 500 ordered bars.   

If they had sold all 500 bars, they would have made $500 profit, but since they only sold $480, they have made $480 profit.    My question is how to account for the $100 they will not collect for the 20 bars they gave away as promotional. 

Total revenue should have been $2500, but in this case it's only $2400.

Expenses should be $2000 (which they paid to head office).

So current profit should be $480 (rather than the intended $500), but if you take revenue less expense it indicates only $400 profit.

Technically, they only lost $80 since they paid head office for bars they did not sell, 

However, they want to show a write off of $100 (the loss of $80 they paid for them, plus the $20 loss of potential profit).

Currently on Simply, the revenue account shows $2400 and expense account is $2000.  

Sorry if it sound so complicated, but the request comes from someone who does not understand accounting in that I have to offset the entry somewhere....just not sure where.

If you are using the inventory module.

You would purchase the bars from the the parent company which will create a payable amount for all the bars. In this action you will create an inventory item for the bar to track quantity of the bars. 

Doing this will not expense or calculate revenue until you sell the item.

Then when you sell the item it post the cost of the item to cost of goods sold expense and gross revenue to revenue account.  Then total revenue minus total expense should equal net profit.

As for the promotional bar given away. 

if you sell them for $0.00 the program will remove the quantity from inventory and expense the costs to cost of goods sold.

 We don't use the inventory module.

They have never asked to report the 'loss' of revenue due to using some of the stock for PR so it's never been an issue up to now.   It was always a straightforward revenue minus expense was the profit made.

 would it make sense to set up a payable from themselves for what they would have collected and then do a negative sales invoice using the write off expense account for the same amount so that the loss cancels out the sale?   Like processing a bad debt.  

Although this way would inflate their true revenue figure, but they'll have to take not only the payment to the supplier but the write off expense in account to calculate what their actual profit would be.

 Hi again:  I have been giving this some thought and I don't think there is really anything you need to do.  If you decrease the Purchases account for the $50.00 lost profit on the 50 bars (a credit) and debit the Advertising and Promotion account for $50.00, the net result is still the same.  The fact is that no profit was made on the additional purchases, so that portion of the profit that would have been credited to Sales Revenue just doesn't happen.     Rita Deering