Stock may be used for the purposes of advertisement. Say, for example a trader who sells medicines may give away some of the medicines as samples to doctors. This effort is made to improve sales. Though this is an expenditure relating to the business, it would amount to selling expenditure which is an indirect expenditure.

Recording - Journal Entry

Usage of stock for advertisement purposes is also an accounting transaction and has to be brought into the books of accounts through a journal entry.

• Debit - Advertisement Expenses a/c

  Using goods for advertisement purposes, amounts to bearing a certain amount of expenditure by the organisation which is paid out in kind. Generally, a ledger account by name Advertisement Expenses a/c is used for this purpose to which the value of goods that have been used for advertisement purposes are to be debited.

  Advertisement Expenses a/c ↓ expense ↓ Nominal a/c ↓ Debit [Debit all expenses and losses]

• Credit

  The value of goods used for advertisement purposes represents the value of stock that been used for purposes other than trading.

  To ascertain the cost of goods sold, the value of stock used for purposes other than trading has to be deducted from the total value of goods by crediting one of the following ledger accounts.

  • Trading a/c
  • Cost of Goods Sold a/c
  • Purchases a/c
  • Stock used for Advertisements a/c

  Which account is credited is dependent on what comprises the value of abnormal loss stock and the account in which the related value exists at the time of recording the entry.

It would be appropriate to adjust the value of goods used for purposes other than trading from the account that holds the total value of goods. The total value of goods can be assumed to be existing as a debit balance in the Trading a/c to which all direct expenses are transferred at the end of the accounting period or in the Cost of Goods Sold a/c if it is being maintained and all the direct expenses are being transferred to it.

The value of goods used for purposes other than trading are to be deducted from the total value of goods (along with the value of good unsold) in arriving at the cost of goods sold. Since the total value exists as a debit balance, deducting from the total value requires the account holding the total value to be credited.

Thus the value of stock used for advertisement purposes has to be credited to the Trading a/c or the Cost of Goods sold a/c in which the total value of goods/stock is existing as a debit balance.

Credited to Trading a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Advertisement Expenses a/c To Trading a/c	Dr	46,000	46,000
[For the value of goods used for advertisements]

Advertisement Expenses a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Cash – To Trading a/c	– – 46,000	– –	– By P/L a/c	– –
		–			–

Trading a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses To Gross Profit	– – – –	By Sales By Advertisement Expenses By Closing Stock	– 46,000 –
	–		–

Credited to Cost of Goods Sold a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Advertisement Expenses a/c To Cost of Goods Sold a/c	Dr	46,000	46,000
[For the value of goods used for advertisement purposes]

Advertisement Expenses a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Cash – To Cost of Goods Sold a/c	– – 46,000	– –	– By P/L a/c	– –
		–			–

Cost of Goods Sold a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses	– – –	By Advertisement Expenses By Closing Stock By Trading a/c	46,000 – –
	–		–

Adjusting the goods used for purposes other than trading from the Purchases a/c would be rational under this circumstance.

The stock used is physically relatable to the stock that has been purchased during the current period and there are no direct expenses in relation to the stock purchased during the current period or the value of stock used does not include the direct expenses incurred during the current period.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Advertisement Expenses a/c To Purchases a/c	Dr	46,000	46,000
[For the value of goods used for advertisement purposes]

Advertisement Expenses a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Cash – To Purchases	– – 46,000	– –	– By P/L a/c	– –
		–			–

Purchases a/c

DrCr
Particulars	Amount	Particulars	Amount
– –	– – –	– By Advertisement Expenses –	– 46,000 –
	–		–

During the accounting period

If the journal entry for recording the stock used for advertisements is being recorded any time during the accounting period, then Purchases a/c has to be credited since the Trading a/c and Cost of Goods sold a/c would not be available in the books of accounts as they are accounts that are created only towards the end of the accounting period.

If the organisation intends to maintain distinct information relating to the stock used for advertisement purposes all throughout the accounting period since it is a frequent occurrence, then a separate ledger account by name Stock used for Advertisements is maintained and all stocks used for advertisements are credited to that account.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Advertisement Expenses a/c To Stock used for Advertisements a/c	Dr	46,000	46,000
[For the value of goods used for advertisement purposes]

The Stock used for Advertisements a/c is a nominal account which provides the information relating to the total value of stock used for advertisements during the current accounting period. It's balance provides the answer to the question, "What is the total value of stock used for advertisements till now"? At the end of the accounting period, it is closed by transfer to the Trading a/c or the Cost of Goods sold a/c or the Purchases a/c depending on what the value in the account represents and which account holds the total value of that kind.

Advertisement Expenses a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Cash – To Stock used for Advertisements a/c	– – 46,000	– –	– By P/L a/c	– –
		–			–

Stock used for Advertisements a/c

DrCr
Particulars	Amount	Particulars	Amount
To Trading a/c	–	By Advertisement Expenses By Advertisement Expenses By Advertisement Expenses	– 46,000 –
	–		–

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period. Thus, for adjustments it would be appropriate to credit stock used for advertisements to either the Trading a/c or Cost of Goods Sold a/c or the Purchases a/c.

Conventionally it is credited to the purchases account.

Working notes for adjustments

Net Entry	Adjustment	Side	Where
Dr. Advertisement Expenses a/c Cr. Purchases a/c	1. (+/✔) to/as Advertisement Expenses 2. (−) from Purchases	Debit Debit	P/L Trdg

Read as

1. Add/Show to/as Advertisement Expenses on the debit side of profit and loss account.
2. Deduct from Purchases as stock used for advertisements on the debit side of trading account.

Trading a/c

DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Purchases − Stock used for Advertisements	12,26,000 46,000	11,80,000

Profit and Loss a/c

DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Advertisement Expenses + Stock used for Advertisements	1,23,000 46,000	1,69,000

Failing to recognise and record this transaction would not affect the Net Profit figure. Only the Gross profit figure is affected by this transaction.

Illustration

An illustration with some notional figures is given below to see the fact that the net profit is not affected.

Before Advertisement Expense is recorded/adjusted

Trading and Profit & Loss a/c

DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Opening Stock To Purchases To Direct Expenses To Gross Profit		84,000 12,26,000 1,28,000 4,67,000	By Sales By Closing Stock		18,00,000 1,05,000
		19,05,000			19,05,000
To Salaries To Indirect Expenses To Advertisement Expense To Losses To Net Profit		74,000 1,20,000 1,23,000 42,000 1,22,000	By Gross Profit By Miscellaneous Income		4,67,000 14,000
		5,27,000			5,27,000

After Advertisement Expense is recorded/adjusted

Trading and Profit & Loss a/c

DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Opening Stock To Purchases − Advertisement Expenses To Direct Expenses To Gross Profit	12,26,000 46,000	84,000 11,80,000 1,28,000 5,13,000	By Sales By Closing Stock		18,00,000 1,05,000
		19,05,000			19,05,000
To Salaries To Indirect Expenses To Advertisement Expenses + Stock Used for Advertisements To Losses To Net Profit	1,23,000 46,000	74,000 1,20,000 1,69,000 42,000 1,22,000	By Gross Profit By Miscellaneous Income		5,13,000 14,000
		5,27,000			5,27,000

We can say that an expenditure equal to the value of stock used for advertisement purposes has been transferred from the Trading a/c to the Profit and Loss a/c or a direct expenditure has been transferred/converted to an indirect expenditure. This results in an increased gross profit figure. But at the same time, the indirect expenses are increased by the same amount which would set off the increased gross profit transferred to the profit and loss account.

The stock that is used for advertisements is stock that is used within the organisation. As such the stock used for advertisements has to be valued at cost based on the principle of mutuality which states that one cannot make a profit out of a transaction with one self.

Principle of Mutuality