COGS impact of free items
Would someone be able to explain to me the accounting impact on COGS if we wanted to give an item for free. Is the best way to add the item and change the rate to $0 or is it to add the item as is and include a 100% discount. We use average costing
. Regardless of the method you use, giving an item for free will impact yourCOGS because you’re incurring the cost of the item without any associated revenue.
Here are the two options you’re considering:
1. Changing the item rate to $0: In this scenario, the item appears on the invoice as $0. The COGS would still reflect the actual cost of the item. This means your gross margin will decrease because you’ve increased COGS without a corresponding increase in sales.
2. Including a 100% discount: This approach shows the full price of the item and then discounts it. Your sales revenue will show the full price of the item and then the same amount as a discount, netting to $0. The COGS will reflect the cost of the item, leading to a decrease in the gross margin.
From an accounting perspective, both methods have similar impacts on the financials. However, the 100% discount method is often preferred because it allows for better tracking. It provides more visibility into the discounts you’re offering and the impact on sales revenue.