Accounting for Groupon Coupons

While I’m not a fan of Groupon coupons, at least for restaurants, I felt compelled to write a few articles about it.  Today’s piece covers accounting for Groupon coupons, because I’ve seen some really weird accounting recommendations and far-from-best-practices.  As far as I know, none of the more unusual accounting has been suggested by real accountants!
Future articles will cover how to generate the proper entries in QuickBooks, how to set up your Point of Sale (POS) system to properly account for redemptions of Groupon certificates, and why you may be in for a huge shock when the tax man comes a knocking.
For what it’s worth, if you really, really think you need to use Groupon (or Living Social) coupons at your restaurant, at least get the accounting right.  There are four types of entries that need to be made in your accounting system, which are:

  1. Setting up the initial distribution of Groupon certificates,
  2. Paying Groupon its fee or commission for selling the coupons,
  3. Recording the redemptions of coupons by customers, and
  4. Accounting for any remaining coupons that expire.
I’m going to take you through these transactions, using an example.  Here are the facts:
  • RestaurantCo offers 100 Groupon certificates that provide $100 worth of meals/drinks for $50.
  • Groupon charges RestaurantCo 25% of the face value, or $25 per certificate for marketing and administration
  • Only 90% of the certificates are actually redeemed at RestaurantCo prior to the expiry date
  • Groupon and RestaurantCo are registered for HST

Initial Distribution and Setup
RestaurantCo has promised to accept $10,000 worth of Groupon certificates.  This represents a liability owing to coupon holders.  Therefore, it needs to be set up as a current liability on the books of RestaurantCo.  Note that most of the recommendations by others on the internet and on Intuit’s communities (at least in the U.S.) fail to record the liability.  Instead, they show this as a sale!
Unfortunately, RestaurantCo doesn’t receive $10,000 for the coupons that are issued.  In fact, it receives $10,000, less the discount offered to customers ($100 – $50) x 100 certificates, or $5,000, less the commission paid to Groupon of $2,500 (plus HST of $325).  So, RestaurantCo receives a cheque for $2,175.
This is where it gets complicated (which is a code word for “interesting” to an accountant).  We do have to consider the tax implications of certificates that are redeemed.  In Canada, the Groupon certificates are considered to be gift certificates, for the purpose of determining whether GST/HST applies to any transactions.  The sale of gift certificates by RestaurantCo (and by Groupon) is not considered a taxable “supply” (or sale).  Therefore, there is no HST charged on the sale of the certificates.
However, when the certificates are redeemed by the customers, RestaurantCo is deemed to have received $50 (price paid by the customer to Groupon) for the $100 of meals received.  So, we have to keep track of the amount paid by the customers (to Groupon) for the certificates and we have to keep track of the face value of the certificates, because that is the value of meals that RestaurantCo owes to coupon holders.
Note that Groupon’s fee to RestaurantCo is a taxable sale!  Therefore, the journal entry to record the initial distribution of Groupon certificates is:

Note that Groupon’s fee is set up as a promotional expense and that $325 of HST has been paid on that amount.  The $5,000 Deferred Promotion Expense is the difference between the $10,000 face value of the coupons and the $5,000 paid by the customers, which will be taxable to RestaurantCo when the certificates are redeemed.  So far, there is no taxable sale by RestaurantCo, but because the Groupon fee is not refundable, it is expensed when the coupons are issued.  We could defer this item and expense it as the coupons are redeemed, but most coupons are redeemed in the same year as they are issued, so this method is simpler.
The above entry records steps 1 and 2 of the Groupon promotion.
Coupon Redemptions
When customers come into RestaurantCo and redeem their coupons for meals, we need to record these transactions in the accounts.  Each coupon redeemed will reduce the liability for outstanding gift certificates, by $100, and we need to recognize $50 of promotion (or discount) expense that we deferred during the initial setup.  Under Canadian law, we need to charge the customer HST on the net value of the meals sold.  In our case, the net sales value is equal to the amount paid by the customer for the Groupon coupon – $50.
Recall that only 90% of the coupons are redeemed, in our case.  The following journal entry records the redemption of 90 gift certificates, assuming the customers only purchased $100 worth of meals, each.

Note that RestaurantCo records $9,000 of revenue, which was paid for using 90 certificates.  HST is charged on $4,500, not $9,000, because that is the amount paid by the customers to Groupon.  RestaurantCo must charge and collect this amount from the customers.  The liability for certificates outstanding is reduced by $9,000, leaving a remaining balance of $1,000, made up of 10 unredeemed certificates.  Similarly, the deferred promotion expense is reduced by 90 x $50, or $4,500, leaving a balance of $500.  The reduction in deferred promotion expense is matched with an increase in the promotion expense.
I’ll cover this in more detail in a future article, but make sure you understand the calculation of HST on these types of transactions.  Note that HST is not charged on the regular menu prices of the items ordered.  Even though full menu prices are used to record the restaurant’s sales, tax is only charged on the amount net of the customer’s discount.  If you make the mistake and charge tax on the full menu prices (and treat the coupon’s face value like money), you will have over-charged your customer and you will be required to remit all of the amount collected to the CRA.  In other words, you don’t get to keep the over-charged tax!
At Expiry
Coupons don’t last forever.  RestaurantCo wants people to come in and try the restaurant as soon as possible.  So, the coupons issued are given a fairly short expiry date, after which they are worthless.  Given that RestaurantCo still has some certificates outstanding at the expiry date, we need to make a final journal entry to clear up the accounts.  We need to eliminate the remaining liability for certificates, because RestaurantCo no longer owes this amount to coupon holders.  We also need to deal with the remaining deferred promotion expense.  We need to record the following entry:
At this point, we have eliminated both the liability for certificates and the deferred promotion expense.  The credit to promotion expense is actually a recovery of promotion expense related to the Groupon promotion, because RestaurantCo saved $50 on each certificate that expired.
Seek Professional Advice
The example in this article was based on Canadian tax laws.  Other jurisdictions may have different policies regarding the sales and income tax treatment of Groupon style coupons.  If you are considering using Groupon or any other similar promotion, please seek the advice of a qualified tax professional, to make sure you are collecting and remitting the proper amount of tax on your sales.

14 Replies to “Accounting for Groupon Coupons”

  1. OMG: That’s complicated. So it makes it sound like what I’ve been doing is all wrong. I have done Groupons for a photography service. Here’s all I do;
    I charge the value of the taxes on the Groupon to the client. So for a $65 Groupon that comes to $7.80. I live in Mb so taxes are 12%
    I add the taxes onto whatever else they purchase like a normal sale.
    Then once I get a cheque from Groupon, I subtract the 12% that I need to pay in sales tax on any income that I have.
    Am I selling myself short? Your way is much more complicated and I don’t even begin to understand it.

  2. My understanding is that Groupon is not a HST/GST registrant and therefore there is no HST/GST portion to their fee. Please help me understand as your article states “Groupon’s fee to RestaurantCo is a taxable sale!”. Thank you.

  3. I questioned an employee of Revenue Canada about whether hst should be charged on the full value of a restaurant dinner package (i.e. $100 value /$ 50 discounted price) and she told me that hst was to be charged on the full value. The reason being, if a customer were to purchase this dinner package without a wag jag or Groupon voucher, he or she would have to pay hst on the whole amount. You indicate in your article that paying on the full amount is against Canadian law and in fact, the customer is overpaying hst. Who is right???

    1. The CRA employee is wrong. Policy Statement P-202 is quite clear on this issue. In Example 7, it is the CRA’s position that the restaurant is required to charge HST on the promotional value of the certificate, which is $50 – the amount the customer paid for the certificate. This is the logical result of the set of transactions. If the certificate had been issued for the full face value of $100, by the restaurant, then the certificate is like cash. The restaurant would have to charge HST on $100. Instead, if the restaurant sold you a $100 meal for $50, they would only have to charge HST on the $50 you pay. It is the same with these discount coupons. The restaurant receives the $50 and the customer gets $100 worth of goods that the restaurant discounted to $50. HST applies only to the discounted sale amount.
      There’s a little lesson in this: tax advice from CRA officials is worth exactly what you paid for it!

      1. We sent an email to groupon asking about the GST and this was their response….
        Yes, we remit money directly to the CRA on your behalf so you should be able to go through your normal process of claiming returns from them with the money we report.

  4. I solved my problem. He was saying that he was charging and remitting GST on the advertising portion. Really poorly explained by him.
    My clients question was. Do you remit the GST on our behalf and he said…
    Yes, we remit money directly to the CRA on your behalf so you should be able to go through your normal process of claiming returns from them with the money we report.
    Not the correct answer to a new business owner that is so new to all of this. I am just glad we connected before they ended up owing a bunch of uncollected GST! Thanks!

  5. Any thoughts on how to correctly account for Entertainment Book discount coupons? In this case there are no promotional fees to the Entertainment Book people, they will just put your business in (without asking – but that’s another story).
    My belief is that one can not expense the discount amount as if it were a promotional expense. It’s already caused my gross income to drop right at the point of sale, so in essence the tax benefit has already occurred.
    IE, $10 discount coupon, on a $100 meal purchase.
    My gross income on the sale is $90.
    I can’t then also expense the $10 as promotion, since it’s already “taken off the top” of my income..
    (doing year end, trying to tie up loose ends).

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