Running a new business

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Chandan Arora (Querist)
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23 September 2016 Hi Professionals,

We are running a business where our customers paying installments every month and in return we deliver them products at the end of last installment.except this we make a draw every month and winner of draw gets rewards like vehicles,jewellery and iphones etc.we have also a plan if anyone gives us sale,we give them rewards as i mentioned above.we make cash purhcases and give them to our winners.we also give them commision on target completion.my question is what accounting treatments are needed to be done here.do we consider these a sale or gifts.what journal entries are required to be passed.any help would be highly appreciated.

Chandan Arora

Chandan Arora (Querist)
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26 September 2016 kya koi bhi nhi hai answer dene wala yha?

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
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22 July 2025 Hey! Your business model has some interesting layers, so let's break down the accounting treatment for each part:

1. Installment Payments & Product Delivery
When customers pay installments before product delivery:

Record the installment received as a liability (Unearned Revenue/Advance from Customers).

When product is delivered at the end, recognize the sale revenue and reduce the liability.

Journal entries:

On installment receipt:

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Dr. Bank/ Cash
Cr. Unearned Revenue (Liability)
On product delivery and revenue recognition:

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Dr. Unearned Revenue
Cr. Sales Revenue
2. Monthly Draws with Rewards (Vehicles, Jewellery, iPhones, etc.)
These are incentives or promotional expenses, not sales.

The cost of rewards given should be treated as marketing/advertising or sales promotion expenses.

If you buy the items, record the purchase as inventory or expenses.

When rewards are given, record the cost as an expense.

Journal entries:

On purchase of reward items:

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Dr. Inventory / Promotional Expense
Cr. Bank/ Cash / Accounts Payable
On giving reward to winner:

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Dr. Promotional Expense
Cr. Inventory (if previously recorded as inventory)
OR if directly expensed on purchase: no entry on reward delivery.

3. Commission to Sales Agents on Target Completion
Commission paid is a sales expense.

Journal entry on payment/recognition of commission:

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Dr. Commission Expense
Cr. Bank / Cash / Payable
4. Gifts to Customers for Referrals
If the gifts are given as part of sales promotion, treat them as marketing expenses, not sales.

Value of gifts given should be expensed in the period they are incurred.

Summary:
Transaction Accounting Treatment Journal Entry Highlights
Installment received Liability (Unearned Revenue) Dr. Bank / Cr. Unearned Revenue
Product delivered (sale recognized) Revenue recognition Dr. Unearned Revenue / Cr. Sales
Rewards given in draws Promotional Expense Dr. Promotional Expense / Cr. Inventory or Bank
Commission paid Sales Expense Dr. Commission Expense / Cr. Bank
Referral gifts Marketing Expense Dr. Marketing Expense / Cr. Bank

Other Important Notes:
Maintain proper documentation for all rewards and commissions.

GST implications may arise on rewards and commission payments — consult your tax advisor.

Ensure you follow revenue recognition principles carefully for installment sales.

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