How to Record Discounts or Complimentary Products in Ecommerce?
Marketing teams are always coming up with creative ways to incentivize customers to buy more - buy one get one free, cart-level discounts, discounts based on your order value, and gift with purchase are a few popular programs. What’s the best accounting practice in recording and reconciling these special programs?
What’s the main challenge in recording and reconciling discounts or complimentary products in ecommerce?
- To the extent that you can, I would try to differentiate between marketing discounts and promotions and complimentary orders.
- Marketing discounts are usually offered to get a customer to purchase more and are related to a sale transaction. In this case, we typically see companies create a contra-revenue account for discounts and then recognize the discounts when the item is fulfilled and revenue is recognized.
- A complimentary order is an order that’s 100% discounted and could be used for a customer service issue (i.e. free replacement order) or in lieu of a free gift card for the company’s VIPs or people they’re hoping will promote the brand. We often see accounting teams separate these orders out — taking them out of revenue and discounts and booking them at the item’s cost as a marketing or customer service expense.
- For a lot of teams, the challenge is in identifying which orders are related to customer promotions and which orders are related to non-sale activities like influencer marketing or customer service.
How should discounts or complimentary products be recorded to be in compliance with GAAP?
- The general rule of thumb we’ve seen is if the discount is related to a customer transaction then it needs to be part of revenue and contra revenue. If it’s not related to a sales event such as influencer marketing or customer service issues then it gets classified as an expense at cost.
- Every company’s setup and promotional strategy is different and we recommend working directly with your auditors to ensure you’re correctly accounting for the nuances of your business.
How does Blue Onion help to make this process easier?
- Our software helps accounting teams identify orders so they can group them into the appropriate category. You can see orders that are 100% discounted along with order tags, discount codes, and notes.