I am unsure how to account for a free-life time gym membership I will give in the future to one of my customers if they win a challenge after it is selected from a random draw. I am unsure whether it is needed to record now or if I should wait until the membership is awarded? I was suggested to record an accounts receivable account against an expense account such as promotional expense-membership pass. This is the fist time I am doing this to improve the sales of my gym.
Could you please explain me my alternatives.
Why is there an accounts receivable if it is a gift - what is the customer expected to pay?
Basically, you will have an expense (the value of the life-time membership) and a sale (the value of the lifetime membership) which cancel each other out
The only question is do you want to record the two vales (which are the same) once and for all or do you want to record them over the lifetime of the customer
Whatever way you do it, there will nil effect on your P & L and B/S as they will cancel each other out
I want to do it over the lifetime of the customer since I want the burden to be less at the moment. I was planning to make a sales revenue cr and a promotions expense dr
Just record the monthly value of the membership each month as a sale (Credit membership sales or whatever) and debit the same amount to Promotional expenses
It is not very clear what is the value to use - say you sell lifetime memberships at 1,000 then you should record one month each month. So what is the value of the first month - well it’s 1,000 divided by the number of months the customer is expected to live - work that one out, if you can!!!
If you want to carry the future sales and future expenses on your balance sheet although it is not clear what value you would give them either
Honestly, I think you are wasting your time - just ignore the cost and the sale
You can set a recurring sales invoice of $0.00 annually for that customer
Or use a recurring sales invoice of the full annual membership fees and a 100% discount and forget about it. Not so different from @Joe91’s suggestion.
I believe it has to be traceable in your accounts even though it has nil effect. So speak to a local accountant too.
The thing is that giving that free membership costs me $60 dollars a month, the fee I usually charge everyone. But I am unsure if I should record it now since I am unsure whether or not someone will get that, the person that wins the draw has to go through a process to see if the free membership will be given to them. Or do you think should I wait until I am sure someone wins the free membership?
No, it does not. It costs you nothing. You are simply letting someone use the gym. Foregone revenue is not an expense.
I am confused
What are you confused about?
It cost him something. The decision will impact on his return on investment.
One way to do it would be to have non-inventory items called ‘monthly lifetime membership discount’ and ‘monthly membership fee’, that will cancel each other out. Automate it using a monthly recurring Sales-Invoice.
No, it did not. No money was spent. No debt was written off. @Madeline_Figueredo is in exactly the same financial position as if nothing had been done. And financial performance has not changed. Income and expenses are the same as if the membership had not been given away. Conceptually, this is no different from allowing someone off the street to come into the gym, walk around, and leave.
Look at it this way. This “customer” might or might not buy time in the gym (or a membership) in the future. There is no way of knowing. If the customer decides not to buy a membership, no expense has been accrued. Claiming that there has been an expense would be like a building contractor sending out a quote for a job. If the quote does not result in a contract, the only expense has been the effort of putting together the quote. That is a normal overhead expense that will be attributed to the salary of the cost estimator. But there is no lost income. You certainly could not say that you had 1,000,000 expense because you were not successful in obtaining a contract for a 1,000,000 building.
Now, there may be a business benefit to keeping track of free memberships. Various schemes already discussed will do that. But they all have the characteristic of offsetting imaginary income against an imaginary expense, with no net effect.
The one thing that might influence how you approach a situation like this is if “free” promotional benefits are taxable in the local jurisdiction, even though nothing is paid for them. That would be a matter for a local accountant, as @Abeiku suggested.
He is definitely going to be obligated to provide a service for that customer he won’t receive consideration for. It will negatively affect cash flow (revenue) and that is a real loss. But I guess i’m looking at it from a different perspective.
Economically, yes forgone benefits is an opportunity cost.
But as far as accounting goes costs are either an downward remeasurement of an asset or an upward remeasurement of a liability.
So unless @Madeline_Figueredo intends to bear operating losses just to fulfill this free lifetime membership, then this transaction doesn’t mark down assets or give no rise to a new liability. So it’s not required to record anything but it’s also not forbidden to create a gross sale against a discount or an expense.
So my advice to Madeline is to either do as other guys suggested and issue a zero valued recurring invoice – you can get fancy and record a line for $60 and another line for -$60, or go all the way and classify each line in a different account. Or just skip the whole thing.
In my opinion there is a wholesale cost of providing the service. That is an expense the businesses will pay.
When working out the average cost per customer, the number of free memberships will need to be included.
Similarly the numerator will need to include all the actual cost. Changing these to a dedicated marketing account is reasonable.
I think the point @Tut is making is the majority of the per customer costs in a gym are fixed cost already included in the businesses profit & loss.
@Patch, your view could apply if the business is actually allocating costs to individual visitors, such as towel laundering, machine disinfection, etc. But those must be real expenses, not just lines on an invoice. For example, locker rental is neither an expense nor lost income if you give it away. That would only have been a way to charge more to a paying customer.
I assume from @Madeline_Figueredo perspective he is running a marketing promotion and would want to be able to see the return on investment of the marketing program. To do so he needs to know the real cost of running the program.
That will include direct and indirect cost.
I agree. But even indirect costs need to be real before being recorded as expenses.
Thinking about it
The actual business costs for a gym free membership promotion, mostly occur as a result of capacity management issues. Extra staff for larger or additional classes. Customers not attending their desired class or time because it’s too full. The costing for this would be mostly easily calculated outside of an accounting program, but would involve pulling information from the accounting program.
Free life time memberships only makes business sense if there is an ongoing additional income stream from those “free” membership. Such as attending the “free gym” while paying to stay at the hotel. For a stand alone gym free x months membership for the first y applicants makes for more sense as there is a path to a sustainable income stream.
I will give a lifetime membership to the customer that gets selected from an automatic draw I am doing when they come to visit the gym. When the person is selected, the person will have to compete to get the prize. The probability for that is unsure, I promised to give the lifetime membership given the fulfilment of the conditions. I am unsure whether or not I should record now the event that is happening in the future. I dont know if I should wait until the person wins the prize to make the recording and what should I record, a liability? or revenue? This is a marketing initiative.