Rebate Accounting: Procedures, Challenges & Solutions (2024)

When it comes to rebate accounting, there’s a lot to know in order to get it done right. While you’re likely familiar with the concept of a rebate, we are going to break down the different types of rebates to determine the proper accounting procedures. From a vendor rebate accounting entry to customer rebates accounting, this guide will cover all you need to know.

At the same time, we will cover the common challenges that rebate accounting can cause. With it, we offer how automation solutions can easily help to overcome hurdles and streamline rebate accounting procedures.

Coming Up

1. What is a Rebate?

2. What are Supplier Rebates?

3. What are the Types of Rebates?

4. What is an Example of a Rebate?

5. How to Account for Customer Rebates?

6. How to Account for Vendor Rebates?

7. How to Account for Unclaimed Rebates?

8. How to Account for Coupons?

9. How to Pay a Rebate to a Vendor

10. What are the Challenges of Rebate Accounting?

11. How Automation Improves Rebate Accounting?

12. Closing Thoughts

What is a Rebate?

A rebate is a retroactive payment back to a buyer of a good or service. After the sale has been made, the rebate lowers the full purchase price by returning either a lump sum or percentage of the sales price back to the buyer.

In some instances, rebates are offered only when a certain purchase volume has been met. This condition makes sense because a rebate is intended to increase the volume of purchases.

Rebates can be granted on behalf of businesses directly to customers or on behalf of suppliers. We’ll cover both types below so that your rebates accounting entry can be recorded accurately.

What are Supplier Rebates?

Businesses can sell products or services with supplier rebates. In this case, the supplier will provide the money back to the customers. From a business’ perspective, both your expenses and costs of goods sold will be reduced from this kind of rebate.

Supplier rebates can come into play in different contracted ways. Let’s look at these supplier rebate examples:

1. A supplier might offer rebates only to businesses that make purchases over a certain dollar amount.

2. Suppliers can offer rebates to vendors that fulfill a target percentage increase in the number of products sold.

3. Suppliers can provide end-user rebates, in which case the customer has to apply for a rebate directly on the supplier’s channels, rather than the vendors.

What are the Types of Rebates?

Rebates can be a creative way to boost sales. As such, there are different types of rebates. Here are a few commonly used rebate setups:

1. Volume Incentive Rebate

One of the most common types of rebates is a volume incentive rebate. This rebate protects vendors in the event that they don’t end up selling as much as they had hoped. Buyers receive rebates only once they’ve hit volume-based turnover targets (i.e. bought a certain amount of product in a given amount of time).

2. Value Incentive Rebate

As opposed to calculating rebates based on pure volume, a value incentive rebate is achieved when buyers reach value-based turnover targets (i.e. a certain dollar amount has been reached).

3. Product Mix Incentive Rebate

If you’re a vendor who is looking to diversify the types of products your customers are buying from you, then a product mix incentive rebate may help. The goal would be to win the business from your customer over competitors. For example, you might offer a rebate for TVs under the condition that the customer also purchases computer equipment from your business.

Keep in mind, the above is an abbreviated list of rebate types.

What is an Example of a Rebate?

Let’s consider a simple example of a rebate that states a customer can receive a rebate for buying a specific volume of a product in the time that the rebate is offered (a volume incentive rebate).

For example, if a customer purchases over 10 units of paint (priced at $10 a pint) from a paint store within a quarter, then they can receive a 5% rebate. Once the customer buys their 11th pint of paint, then they can get the rebate, which would mean that they actually spent $9.50 on each unit.

How to Account for Customer Rebates?

Now that we’ve covered the basics of rebates, we are going to dive into how to account for rebates. This is where things can get challenging, but they don’t have to be. There are finance automation solutions that can track rebates and accounting processes so your team doesn’t have to manually do so. The use of such solutions will increase efficiency, save time, and reduce errors.

Sales rebates go back to the customer. If the rebate is being paid by the supplier to the customer, then the vendor accounts for this rebate as a reduction from the cost of goods sold (COGS).

For example, HP (the supplier) may offer a customer rebate that Best Buy lists on their computers. Best Buy isn’t reducing the price, the manufacturer is. To Best Buy, this reduction in the wholesale purchase price relates to its cost of goods sold.

How to Account for Vendor Rebates?

In some cases, rebates are considered income. This happens when a business provides a service to another business or directly to a customer, and there’s a vendor rebate being offered by a third party. An easy example of this is when a company installs solar panels and the utility company is offering a rebate.

The customer will pay the vendor directly for the installation service. The customer will fill out the rebate information for the service provider. The service provider will discount the price of installation in exchange for the income they’ll receive from the utility company (third party), which is considered income.

How to Account for Unclaimed Rebates?

A lot of rebates go unclaimed, which begs the question: how do you account for them? You should record them just like you would for claimed rebates. It might also be required to report unclaimed rebates according to your state’s commerce rules, which goes to the state controller.

How to Account for Coupons?

Rebates should not be confused with coupons. Rebates are retroactive. Coupons are discounts on existing or future purchases that take place at the time of purchase. But, the accounting for coupons depends on the timing of payment itself.

For example, if a coupon discounts the price immediately, then it’s recorded as a reduction in revenue. If the coupon is offered for a future purchase, the coupon will again reduce the revenue when used for a later purchase. Essentially, the rule is that a coupon gets recorded as revenue reduction only when it is used.

How to Pay a Rebate to a Vendor

Manufacturers often offer rebates to vendors when they meet a certain purchase volume in a period of time. Let’s say that a vendor agrees to purchase 10,000 units of a product from a manufacturer within 6 months. Once they do so, the manufacturer will offer a 10% rebate.

This rebate gets passed along to the buyer. For the manufacturer, revenues need to be adjusted with a reduction, whereas the COGS remains the same. The net sales are affected as they realise a deduction from gross revenues.

What are the Challenges of Rebate Accounting?

As you can see (and probably knew already), rebate accounting can get tricky. There are various types of rebates, and the different conditions affect the books in many ways.

Some common challenges of rebate accounting include:

1. Communication Issues:

Sales and marketing teams may offer rebate incentives that the accounting team then has to account for. However, if there’s any miscommunication or misunderstanding about the terms of the agreement or amounts, the accounting team can end up making costly mistakes. With a rebate management system, however, the rebate deal can originate in the system so that there’s a clear understanding on behalf of everyone involved.

2. Accruals Management:

Without reporting, analytics, and forecasting, you may be privy to errors when trying to manage accruals in rebate accounting. An accrual is the expectation of income at a future time.

For rebates that occur with volume or value over time, each prior purchase must be properly tracked. Tiered incentives rely on one another, so you’ll need to keep track of accruals accurately to ensure the timely payment and amount of a rebate.

As you can tell, with more customers and sales, the harder this will become to do manually. Rebate management systems will keep track of everything for you with utmost accuracy and provide you with historical data so you can forecast properly. Rebate management software will prevent manual errors and allow your team to scale accruals management.

3. Balance Sheet Errors:

When rebate accounting goes wrong, it can affect your business’ balance sheet and raise audit concerns. This can have negative financial effects on your future business practices. If you are expecting your accounting team to track all rebates manually and across spreadsheets, you inherently heighten the risks of mistakes.

How Automation Improves Rebate Accounting?

Finance automation tools have created more agile and accurate accounting teams that get to focus their time on high-level tasks while allowing software to handle the repetitive and data-heavy tasks.

When it comes to rebate accounting, rebate software provides many benefits for rebate management, including improved precision, time savings, enhanced customer service, spreadsheet elimination and more.

Rebate automation software collects information from business systems to manage rebates in real-time. It can be used to model and forecast, calculate rebates, track rebates, process rebates, and analyse rebates.

With access to rebate management software, every team member gains transparency and visibility into what’s working versus what needs to be amended. This way, businesses can maximise their revenues and boost customer satisfaction. Businesses who use rebate management software no longer have to worry about accrual management, rebate reporting, or financial statements because the automation software takes care of all of these crucial business functions.

Besides handling the manual work for you, the rebate software can serve as a business intelligence tool with its suite of analytics and reports that let you identify how to optimise rebates.

Closing Thoughts

Rebates can become complex, but rebate accounting doesn’t have to be. With the aid of rebate automation software, your business can easily manage rebates, increase sales, improve margins, and provide improved customer service.

The common challenges relate to the management of manual, often spreadsheet-based processes. With rebate automation software, you can improve the timing, accuracy and quality of calculations and reporting.

Want to see how it can help you? A tool like SolveXia supports a series of use cases that have demonstrated ROI results in less than 3 months. Here are two examples; a major beverages company and a pharmaceutical organisation - the first automated 57 different spreadsheet processes and the second fixed its rebate verification issues. Learn more or book a demo.