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Free of Cost items... Accounting treatment

Kasim Surve (15 Points)

14 June 2021

Whats the accounting treatment for free of cost (FOC) ITEMS while purchasing and While selling

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5 Replies

Akshay Poriya ((artical assistant)) (313 Points)
Replied 14 June 2021

as per free of cost items received by two ways either it is received along with other primary product or it is received solely from suppiers in the books of accounts as per my accounting method if is received along with other goods then take the increse in this items in quintity by not changing of amount . in the case free items received only the take as a purchase with the nil value , and while sale it all are the gains.it is allow in tally software to entery of purchase items with the nil value.

Kasim Surve (15 Points)
Replied 14 June 2021

Ok thanks

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 15 June 2021

This is called as customer options to buy one good and demand one free.

you have to recognise revenue for every item

you have to recognise discount in revenue for the incentive given - free product.

eg. You sell TV @ hundred rupee

Finished goods hundred TV’s= Ten thousand rupee

if you give one tv free for four purchases, then twenty tv’s worth two thousand rupee will go for free out of hundred tv’s.

when sale is made

Bank a/c eight thousand

Inventory Discount a/c two thousand

To Sales a/c eight thousand

To COS a/c two thousand

The free goods should be accounted in cogs or cos because free sales decreases cos amount,

While purchasing:

Recognise purchases of five televisions sets you purchased (1 is free in this)

Recognise inventory or assets at 5 pieces

Recognise the gain in P&L

check out with your manager if this is correct, or else I’ll modify

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 15 June 2021

Ok fine, they have developed this systems in double entry....when ever you write off inventory, COGS account is debited and inventory is credited. That’s perfectly alright and you have to substitute the names in debit and credit.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 15 June 2021

THE ABOVE IS THE OLD METHOD. THE NEW METHOD IS CALLED AS ALLOCATING THE DISCOUNT (FREE TV) INTO SALES REVENUE WITH A MARKUP SELLING PRICE, THERE WILL BE PROFIT ON SALES. THERE WILL BE LOSS FROM SALES WITHOUT A MARKUP FROM THEBELOW TABLE.

1 TV SELLING PRICE	200
1 free TV for 4 TV
1 Free	200
4 TV Sales with markup @ 60%	1280
		Price	% of total sales	Revenue (Selling price x %)
Sold TV's		1280	0.864865	1024
Discount allocated		200	0.135135	40
Total		1480	100	1064

By Receivables		1024
By Unbilled Revenue		40
To Sales		1064

By Bank		1064
To Receivables		1024
To Unbilled Revenue		40