GAAP Accounting Rules for Expensing Samples
Generally accepted accounting principles outline accounting rules for financial transactions. Companies that sell products often use product samples to show options to customers. These samples can be either manufactured or purchased by the company. In both of these cases, there is a cost to the samples. There are multiple allowable methods of expensing these samples under GAAP.
According to GAAP principles, expenses must be recorded in the period that contains the related revenues. If the expenses cannot be tied directly to revenues, they are to be expensed in the period they are incurred. To incur an expense, the business must be legally responsible for it. The expense does not necessarily have to have been paid for, just contracted. For example, if a business rents office space, each month's rent should be expensed in that month, even if the rent has not yet been paid. For product samples, GAAP principles allow immediate expensing of the samples when the company purchases them or capitalization and deferral of part of the cost to future periods.
Even though product samples may be used over several accounting periods or even several years, GAAP allows them to be expensed when initially purchased. This is due to the fact that samples cannot often be matched directly with related revenues. Many customers and potential customers may view the samples. Some may make a purchase and some may not. Expensing the samples allows the company to recognize the cost when incurred rather than trying to determining which future periods the expense belongs to. To account for the expense, debit Samples or Supplies on the income statement and credit either Bank or Accounts Payable, depending on whether the samples have been paid for.
If product samples can be traced to a specific sale, they can be capitalized and then expensed in the period of the related revenues. For example, if custom wood trim samples were created for a specific customer in May, a company could capitalize the costs on the books and expense them when the customer makes the purchase in September. The initial accounting entries are a credit to Cash or Accounts Payable and a debit to Prepaid Expenses. When the cost is expensed, the Prepaid Expenses account is credited and the Samples or Supplies account is debited.
If a company chooses to capitalize product samples and expense them in a future period or over multiple periods, it must review them regularly to ensure that they are still usable. If a capitalized product sample becomes obsolete or otherwise not used by the company any longer, it must be written off in that period. This also holds true if the sample is damaged and can no longer be used.