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If a company offers a 50$ credit to an existing customer for referring a friend and...

If a company offers a 50$ credit to an existing customer for referring a friend and if the new customer buys something the company will give the existing customer a 50$ credit to their next purchase. How would the company record this - as a reduction of revenue or a marketing expense and when would the comapny record the referral credit and what is the journal entry for it?

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Answer #1

The company will record it as a marketing expense because it is directly related to the promotion of company's activities and in any way does not related to reduction of revenue.because such activity does not relates to any ordinary activities incurred in the normal course course of business for earning revenue and which is the basic citeria for recognising revenue.

the company would record the referral credit when the referal process gets completed i.e successful referal has been given by the existing customer to the company.And the credit entry would be-

Profit and loss account

To customer account.

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