Accounting Procedures for Product Rebates (2024)

By Kimberlee Leonard Updated November 29, 2018

Coupons and rebates are great promotional incentives to encourage customers to buy items from a business. Properly accounting for coupons and rebates is often done incorrectly because the classification gets confused. Coupons discount a price at the time of purchase. Rebates are a payment back to the buyer. No all companies follow the same guidelines for recording rebates and treat different types of rebates differently.

Accounting for Customer Rebates

Sales rebates pay the customer back for the sale. The rebate could be for some or all of the purchase. The rebate has a cash value, because it is given to the customer after the purchase, though it is sometimes treated as a coupon – for example, when rebates are given at the register. The key difference is that a coupon discounts a price, while a rebate refunds part of the full price back to the customer.

Rebates paid for by the supplier are accounted for as a reduction of the cost of goods sold (COGS). For example, a car dealership sells a car that has a $200 factory rebate. The dealership isn't reducing the price of the car. The customer is getting money from the manufacturer that made the product. To the dealership, this is a reduction in the wholesale purchase price of the car. In this case, the reduction also reduces the depreciation cost of the car.

Vendor Rebates Accounting Treatment

When a business provides services to another business or customer, it may be eligible for a vendor rebate from a third party. This is common with utility companies paying for solar installation or water conservation landscaping.

The installation company gets paid by the customer to perform the duties. In many cases, these service providers have the homeowner complete the paperwork to get the rebate sent to the service provider. Essentially, the company is giving the consumer a discounted upfront price in exchange for the rebate. The rebate funds paid by the utility company to the service provider are considered income.

Unclaimed Rebates

Some rebates are never claimed. These may be refunded checks that never got cashed. Record them according to the rules you set forth for claimed rebates for that particular product or service. Then report unclaimed rebates based on state commerce rules. Most unclaimed property, including rebates, are recorded with the state controller.

Accounting for Coupons

Coupons are discounts on an existing or future purchase. The accounting for this often depends on when the money is likely to be given to the company. A coupon that discounts the price immediately at the time of purchase is recorded as a reduction in revenue. For example, if a 10 percent coupon is given on a $20 purchase, the recorded revenue is $18 ($20 x 10% = $2 discount).

If the coupon is given for the next purchase, the full revenue of the immediate purchase is recorded. There is no discount to COGS, and the coupon only reduces revenue if it is used at a later purchase. Until the coupon actually reduces a sales price, it isn't accounted for on the books because there is no guarantee it will be used.

Paying the Rebate to Vendor

Many manufacturers and wholesalers offer rebates if a specific volume is met over time. For example, a buyer might say he will purchase 15,000 units over the course of 12 months. You might have a rebate of 10 percent issued when the purchase meets this threshold. When you send the rebate to the buyer, you adjust your revenues with a reduction because the COGS remained the same. In this scenario, the rebate affects net sales and would be accounted for as a deduction from gross revenues.

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Accounting Procedures for Product Rebates (2024)

FAQs

Accounting Procedures for Product Rebates? ›

If the rebate is recorded at the point of sale, the rebate value is recognized as revenue when the product is sold to the end customer. However, if the rebate is earned at the point of purchase, it would be recorded as a reduction in the cost of the inventory at the time of purchase.

How do you account for rebates in accounting? ›

The rebate is recorded as a revenue reduction at the time of sale, resulting in a lower net sales figure on the income statement. No separate liability account is typically established for price reduction rebates since they are considered to reduce the sales price directly.

What is the accounting standard for rebates? ›

There are no specific accounting standards for rebates. Rebates typically relate to cost of goods sold and are therefore captured under AASB 102 Inventories.

What is accrual accounting for rebates? ›

The rebate accrual is the amount of rebate that has been earnt, but not yet received (or for customer rebates, the amount that is owed but not yet paid). For example, you may earn a quarterly rebate based on overall spend with a given supplier, but that supplier might only pay that rebate at the end of the year.

What type of expense is a rebate? ›

Ans: Rebates are accounted for either as revenue reductions or separate expenses, following the organisation's policies, and can be categorised as marketing expenses or deducted from sales revenue.

How to account for rebates in GAAP? ›

Under both GAAP and IFRS, rebates are generally treated as a reduction in the transaction price. This treatment affects the revenue recorded by the seller and the cost of goods sold on the buyer's end. Recognizing a rebate involves two key elements: its probability and the ability to estimate its value accurately.

Are rebates a contra revenue or expense? ›

Three of the most common contra revenue include: Sales Allowances or Rebates — When a product doesn't live up to a customer's expectation or when it's defective, the seller may decide to give out sales allowances to save the sale. A sales allowance is the amount deducted from the actual selling price.

How do I categorize rebates in Quickbooks? ›

To do this, go to the Vendors menu, select "Enter Bills," and then choose the "Credit" option. Here, you'll enter the vendor's information, the amount of the credit and the expense account that the rebate affects.

How do rebates work in business? ›

What is a Rebate? Rebates are an incentive program in which a supplier offers their customers a monetary reward for reaching designated purchasing goals. After the target specified in the agreement is met, customers can claim a percentage of the purchase price back for a better deal on their order.

How do customer rebates work? ›

A rebate is a refund offered to a customer by a manufacturer, distributor or retailer when a customer makes a purchase. Sometimes referred to as a retroactive discount, rebates are often used as an incentive or marketing tactic to attract customers.

How to audit rebates? ›

5 steps to auditing your rebate accounting processes
  1. Review the accessibility of your deals. ...
  2. Check you are not exposing the business to risk. ...
  3. Examine whether you can report accurately and efficiently. ...
  4. Consider whether rebate claims have been missed in the past.
Nov 17, 2023

Is rebate accrual debit or credit? ›

Accrual Receivable (Debit) Account

When receiving rebates, this account is debited when you accrue the rebate amount. When you reverse the journal entry, this account is credited.

What are the receivables of rebates? ›

Rebate Receivables means those rights to payment associated with vendor rebate programs, which rights of payment accrue to the Borrower or any Restricted Subsidiary.

What is the difference between cashback and rebate? ›

Cash back means to earn on what you spend irrespective of the purchase. Cash back includes, offers, deals and money itself to be spent later. Rebate is the amount of the purchase price refunded by the seller to the buyer, when the quantity purchased reaches the specified limit.

Is rebate a direct expense? ›

Direct Expenses are to be net of any discount, rebate, taxes and duties refundable, if any. be determined on the basis of amount incurred in connection therewith.

How to pass journal entry for reimbursem*nt? ›

Add the expense and reimbursem*nt to your accounting records. You may choose to add the reimbursem*nt as a short-term loan so that it disappears from your books after the client pays it. Another option is to list your original payment under expenses and the repayment from the client under revenue or income.

Are rebates receivables? ›

Rebate Receivables means any amounts owed to Borrower by a direct distribution vendor or manufacturer of products sold by Borrower as an incentive to sell products offered by said distributor and/or manufacturer, and/or a reimbursem*nt of funds charged by Borrower's distribution vendors at the time of initial purchase.

How do you record an expense refund in accounting? ›

RECORDING EXPENDITURE REFUNDS. Refunds and rebates should be deposited in the fund from which the original disbursem*nt was made. Refunds of current year expenditures are recorded as reductions of current expenditures.

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