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:
- Setting up the initial distribution of Groupon certificates,
- Paying Groupon its fee or commission for selling the coupons,
- Recording the redemptions of coupons by customers, and
- Accounting for any remaining coupons that expire.
- 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.
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!
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.