If your business is like most others that manufacture products, you probably give away free samples once in a while. While this may increase your sales and customer satisfaction in the long-run, you need to make sure that you are properly accounting for these free samples on your company books.
The Generally Accepted Accounting Principles (GAAP) describe two different ways that you can account for free samples in your business. You can either expense the free samples or capitalize them.
If you choose the expensing method, you must count the free sample as expenses on the date you purchase them. Even if you might give these pieces of product away in this accounting period, or a future one, you must expense them on your books at the time you acquire them. To record this, debit the samples expense account for the total dollar value of the samples you intend to give away. Then credit the cash if the samples were purchased with cash or through accounts payable if the sample were paid for with credit cards.
If you choose to capitalize the free samples, then you must track exactly when the samples are given away and expense them during that period. To initially account for this on your books, you should credit cash or accounts payable as described above and makes a debit entry to prepaid expenses. When it is time to account for a specific free sample unit, you credit the prepaid expense account and debit the free samples account.
Accounting for free samples by either expensing them or capitalizing them is straightforward according to GAAP. You need to decide on one method, but before you do, you might want to discuss both options with your company’s accountant and see what the best way to handle the task is.