Question by TPJ2010: How do you account for penny auction sales?
As owners of this type of business….Since it is categorized as entertainment shopping, would the product actually be “sold” or would the income you make be considered a “service” type income? Since the main profit comes from selling bids, which cannot readily be attributed to a product, I would think you would account for income as a service-based business and expense the products as “prizes”? Need some thoughts….there is no help online for this!

Best answer:

Answer by jknox84
Given the relatively low selling price on these items in comparison the FMV or MSRP, I would concur that you are selling a service. I have tried to research what I could, but the formal guidance on this is limited since this is such a new trend in shopping I would say you could argue accounting for it either way, but probably the most conservative is as a service-based entertainment business, giving away prizes and as such, these prizes can be part of your operating expenses.

Either way you are netting the same income versus cost, just a timing difference of if you want to recognize revenue when sale of bid packs occur (service based) or when they are used to bid on and allocated to item (sale based), which would then establish a reserve on your balance sheet for unused bids purchased, which is not revenue until used for bidding.

Service Based:
Revenue from Sale of Bid Packs (aka Intangible Membership Fees) $ 10,000
Cost of Prizes Given During Period (Membership Benefits) $ (8,000)
Personnel Cost $ (1,000)
Advertising Website/Maintenance $ (500)
Net Operating Income $ 500

Product Based:
Revenue from Sale of Merchandise (End Bid + Incremental Bids) $ 9,000
Cost of Merchandise Sold During Period $ (7,000)
Personnel Cost $ (1,000)
Advertising Website/Maintenance $ (500)
Net Operating Income $ 500
** You also have $ 1,000 worth of bids also purchased but not yet recognized as revenue (liability on books), which will have corresponding cost of goods sold when used at a later date.

Hope this gives some insight and things to think about.

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