How to Determine Accounting: Customer Loyalty Programs

If your organization offers rewards or incentives or maybe offers such as a free service in return for a purchase, you'll want to consider comprising customer loyalty programs, particularly when posting to general ledger accounts. Jean Scheid offers clear advice!
As an automotive dealer, I often give away a no cost lube-oil-filter service if someone else purchases something such as a car, a far more expensive service, parts, or accessories. Credit card, hotel, and airline companies that hand out points for shopping or flying can also be examples of customer loyalty programs.
So, which are the rules for accounting customer loyalty programs? Well, there is a old-fashioned way and then there are the principles implemented in 2007 from the International Financial Reporting Issues Committee (IFRIC) that a majority of follow nowadays when looking at customer loyalty programs.
The screenshot towards the above-left (click to enlarge) shows that old and the new ways on accounting procedures for customer loyalty programs and what financial documents they affect. As far as CPAs have concerns, however, either procedure is fine as far as following IRS guidelines. A good read on proper accounting procedures, specially when it comes to determining a client loyalty program, is offered from the IRS. Another great publication for determining what qualifies as a customer loyalty program will be the one available from Price Waterhouse Cooper (PWC).
Screenshot by author from PWC
Once you've clarified you indeed are selling customer loyalty programs, you'll want to consider a couple things:
If you answer yes with the idea to of these questions, you should determine what general ledger accounts will likely be affected'what entries are necessary as much as debits and credits and which accounts.
For our example, say I own an airline and offered my loyal customers 100 flying points toward their account every time they fly with my airline. My things for points say they never, ever expire which enable it to be carried from year to year.
I must think about this revenue because I require my loyal, loyal customers to fly before they are rewarded with any points at all'meaning they purchased a ticket! Let's take a review of how I would debit and credit general ledger accounts:
But hold on tight! What if my loyal, loyal customers exclusively use 50 of those offered points within the first year?
Once the loyal, loyal customer uses the rest of the 50 points, I simply:
While it is a very simple example, the ultimate way to determine your making up customer loyalty programs correctly would be to talk with your in-house controller or bookkeeper or ask your tax professional. The publication private transportation from cancun airport PWC (link above) is also very helpful in offering debit and credit designations to the appropriate accounts.
Image Credit (FreeDigitalPhotos)
When taking a look at various customer loyalty programs, some financial documents is going to be affected. For example, the income statement can have a deduction in revenue; the balance sheet can have deferred revenue.
Finally, remember that some offerings are certainly not considered customer loyalty programs. For example, should you offer coupons to customers that enter your establishment, but don't require these to buy anything, this is not considered a person loyalty program. If you offer a discount coupon attached with a product or service an individual must purchase before they have the discount, then that is considered a client loyalty program. If you're unsure how your offerings are checked out per accounting guidelines, ask your tax professional.