I look after a new company that is part of a larger Franchise. The Franchisor insists that the Franchisee spends c£2000 a month on Advertising - they say that this is just a general admin expense, but should it really be listed as a Direct Cost of Sale?
Your views would be appreciated.
Thanks
Ches
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I can see the alternate arguement but to me advertising is never direct enough to be a cost of sale.
In this instance I would agree with the business owner.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Yes, I don't know why Sage doesn't have an advertising code within admin. It hasn't changed in the newer versions. I use 6201 in Sage, but then when I transfer into my accounts production package, I use an admin code. I guess it depends on the business and the type/level of advertising.. and ultimately preference.
Another thing.. are you preparing the accounts?? Cos if you put it to 6201, the accountant will just disclose it how they want to, when they get your TB. :)
Hi Michelle Customer doesnt seem to care at the moment (he has just set up the business)and no I dont prepare the year end, really thinking ahead because I know this customer will care in a couple of months when he has got his head round everything else and then decides he wants better reports and to know exactly what he is spending on what (especially as its a franchise and the franchisor are keen!!) Also sometimes I feel the need to understand more eg what is the correct way and what is preference.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I would treat as an expense rather than a cost of sale as mentioned in my first reply.
There is no right or wrong answer to this one which is a matter of professional judgement and may vary from one transaction to another (i.e. what would happen if the advertising was part of a barter transaction? (see SIC-31)).
The best reference that I can see from the accounting standards is in IAS1 where (paragraph 113) it states "allocating costs to functions may require arbitrary allocations and involve considerable judgement".
which basically states that some expenses are allocated purely on the basis of professional judgement.
The key is that the method used is applied consistently.
Right, think that there is enough there that you are able to argue the case whichever way you decide to go with it.
kindest regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I guess the best thing you can consider in making the decision is - the type of advertising, the service/product, and how the advertising contributes to sales, and of course, the value of the advertising.
A loose example -
Selling perfume... those lovely adverts on the TV are usually shown as direct costs.
Sellling accountancy services - a yell advert is usually shown as administration costs.
Weigh up the reasons for disclosing as each, weigh up the thoughts of the client, and those of the Franchisor. And then explain your thoughts to the client and see what he wants to do.
And I think that shows that we know what we're doing and perfume companies don't... lol. That statement would be so good if it wasn't accountants sorting out the perfume companies.
Actually, I think that I could argue that one myself in that the being made to feel good about parting with your cash is actually part of the selling process for luxury products and I would imagine that the expeniture on the advertising would be some mind numbing amount where trying to explain it away under general expenses just wouldn't cut the mustard.
For your average accountancy service provider where we even try to beat Vistaprint down on price then the whole concept of advertising adding to the buying experience gets lost.
Maybe thats the real differntiation, if the advertising is part of the process then its a cost of sale but where its an overhead that gets considered after the budget for Tea, coffee and dancing girls then it's an expense... Sorry, I've just been informed that dancing girls are not a legitimate expense... Just popping into VT for a while...mumble, mumble, some point there is being a director, mumble...
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Ah you see, Shaun, this one IS sort of part of the process as they are forced into submission by the franchisor - terms are that they spend 'at least' £2k per month on advertising - where they do it is up to them of course. Although my franchisee has told them to naff orf in the nicest way! None of this beating Vistaprint into freebies like the rest of us (if only I could get my blitherin' logo right then I wouldnt have to pay for that too! (Im trying to get it right!!) Im guessing if dancing girls arent a legitimate expense then dancing boys arent either! Booooo.
I reckon I will talk to my client, when he has stopped having a nervous breakdown over HMRC!! (Blitherin idiots have messed him up big time)
I love t his bookkeeping lark!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
There you go. I was your practice run for the conversation that you are going to have with the client.
I love this bookkeeping lark too espechially for questions like this one where there is more than one possible correct answer and you just have to be able to argue your corner but with an open mind to the alternatives.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
