[misse2000]

I’m at work and I’m stumped. I’m a new staff accountant at my company and we collect payments from multiple customers
. We offered to take care of marketing expenses for one customer and instead of submitting a payment I’ve been requested to apply a credit against their open invoices instead. Could you tell me what the difference is between applying a credit vs collecting the payment? Does the credit method prevent revenue being earned? How can I apply a credit to ensure that revenue is recognized? I’m trying to see which has the best benefit because I’m not sure..thanks so much!

[Missy]

The credit can be associated with an expense account or revenue depending on how its set up.

In quickbooks (which you may not be using but the same principal will apply in any software) I can create a credit to a customer and the item I select to appear in the body of the credit memo will either affect a revenue or an expense account. Your credit in this case would increase your company's marketing expense rather than reduce the revenue earned.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[misse2000]

Could you explain to me how it affects the Recenue side with the details below? Let’s consider it’s just a credit for an incentive agremement that they earned. Would this be my JE? Would the revenue simply wash and not be accounted for?:

Invoice JE:
A/R 2,000
Revenue (2,000)

Credit:
A/R 2,000
Revenue (2,000)

[Missy]

To be honest the best way to handle it is to set them up as a vendor too and treat the incentive like an invoice from them. And if you're using software better to handle via the ap and ar modules than doing journal entries. It CAN be done by JE but its not a best practice.

For the sake of visualizing though:

Invoice JE:
A/R 2,000
Revenue (2,000)

Credit:
Customer Incentive expense 2,000
A/R (2,000)

The AR will wash to zero but your revenue will not be decreased.

However what you call the expense for the customer incentive is a decision that should be made by your controller or CFO.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[misse2000]

Thanks so much! So it’ll effect the net income but not the revenue? It would be more beneficial to collec payment instead of true?

[Tim]

The revenue was already credited when the invoice was created. You credited revenue and debited accounts receivable. Now you will just credit the receivable for the expense amount and debit an expense account.

Of course when you do something for a customer free of charge it will lower net income. I'm assuming it was part of the sales negotiation or just doing something to keep the customer happy. Either way it's a cost of doing business.

[Author]

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