Accounting for Vendor Rebates: Procedures & Challenges

Accounting for vendor rebates can either be complex or easy. To make it easy, many organizations leverage the aid of financial automation tools. Whether you choose to handle rebates accounting manually or automatically, there are important things to know. We’ll cover all the bases in this article.

Coming Up

1. What is a Rebate?

2. What are Supplier and Vendor Rebates?

3. What is Inventory Rebate Accounting?

4. Why Does Rebate Accounting Matter?

5. How to Account for Vendor Rebates?

6. What are Customer Rebates?

7. How to Account for Customer Rebates?

8. Why is Accounting for Customer Rebates Important?

9. What are the Types of Customer Rebates?

10. What is the Impact of Customer Rebates on Financial Statements?

11. What is Vendor Rebates Accounting Treatment?

12. What are Unclaimed Rebates?

13. How to Account for Coupons?

14. How to Pay Rebates to Vendors?

15. What are Accounting Challenges of Vendor Rebates?

16. How Can Rebate Tools Help with Accounting for Vendor Rebates?

17. The Bottom Line

What is a Rebate?

A rebate is a type of incentive that’s typically valid for a specific period of time. A rebate is an agreement to return a portion of the purchase price to the buyer after the sale has been made.

Although many people want to think of a rebate as a discount (because theoretically, it is), it is different from a discount because it is retroactive, meaning it occurs after the purchase. Discounts, on the other hand, are taken at the time of purchase.

What are Supplier and Vendor Rebates?

Vendors and suppliers can offer rebates. If you’re a business that purchases from a supplier who offers a rebate, you can expect the supplier to provide the rebate directly to the customer. For your rebates accounting entry, you’ll adjust your business’ expenses and cost of goods sold.

Supplier rebates can come in many forms. For example, a supplier can offer a volume rebate to businesses that purchase a certain number of goods in a set period of time. Or, they may offer a target percentage rebate in the case the business reaches a target percentage increase in the number of goods sold.

What is Inventory Rebate Accounting?

Inventory rebate accounting is conducted to evaluate the value of rebates that are currently held within your inventory of goods. Inventory rebates can either be accounted for at the point of sale or the point of purchase.

Here’s how each scenario plays out in the case when a distributor is buying goods from a supplier and receives a rebate based on the volume they purchase:

• Point of Sale: When the product is sold to the end customer, the rebate value is recognized as revenue

• Point of Purchase: If the rebate is recognized when the inventory is purchased from the supplier, then it would be recorded as a reduction in the cost of inventory when it was bought.

Why Does Rebate Accounting Matter?

Businesses must know their profitability in order to make wise decisions. Accounting for rebates allows for there to be a true understanding of the profitability of sales, having taken into account the value of a rebate. 

By accounting at the point of sale, then it is considered to be revenue when it is earned, which is rightfully the case. But, in order to do so, there must be a clear and standardized approach for companies to track their sales against rebate agreements. 

Having a rebate accounting software in place can help to automatically track sales against agreements with utmost accuracy.

How to Account for Vendor Rebates?

Rebate accounting for vendor rebates is often a point of question for many accounting teams. Since there are many different hands involved, we will clarify what’s expected.

ASC 705-20 offers accounting guidance for this matter. Here’s what it states:

• Cash consideration that’s received for a vendor is considered a reduction in the price of the vendor’s products or services

However, there are exceptions to this rule, including:

• The sales incentives can be in the form of rebates to end-buyers when the consideration received from the manufacturer is for sales incentives to the customers (as opposed to the vendor)

• The consideration received represents a reduction of costs and need to be specific, incremental, and identifiable in the case that the consideration is received for the reimbursement of costs incurred by sellers for the vendor’s products

What are Customer Rebates?

Customer rebates are promotions that provide money back (a set portion of the sales price)  to a customer after the completion of a sale. Rebates are a useful tool to drive more sales. 

However, just like vendor rebates, customer rebates entail a fair share of due diligence and tracking when it comes to accounting. From the get go, rebate agreements have to be clearly defined and communicated. Then, the accounting team must coordinate with sales and marketing teams so that deals are properly paid out in a timely matter when they are eligible for a rebate. 

The ultimate goal is to have a streamlined customer rebate accounting setup so that you can deliver what you promise to your customers. After all, the goal of rebates is to not only boost profits, but also to strengthen customer relationships and enhance loyalty. 

How to Account for Customer Rebates?

Customer rebates are sales rebates that go to the customer after the purchase. Rebates are given to the customer after the purchase, which is equivalent to cash value. If a rebate is offered at the register, then you can consider it to be a coupon instead of a rebate as it discounts the purchase price.

Rebates accounting for customer rebates depends on who grants the rebate. When suppliers pay for the rebate to the customer, then it’s to be considered a reduction of the cost of goods sold (COGS).

The customer receives the money back from the manufacturer, whereas the vendor selling the product can consider it a reduction of the purchase price. Depending on the product, the reduction may also affect the depreciation schedule (for example, if a car manufacturer offers a rebate).

Why is Accounting for Customer Rebates Important?

Accounting for customer rebates is crucial because rebates are also required to adhere to Generally Accepted Accounting Principles (GAAP). Beyond compliance, customer rebate accounting impacts revenue and timing of reporting. 

Customer rebates may either need to be recognized at the time of sale or deferred, based on the rebate agreement’s terms. 

If you fail to properly document and record rebates, then you may end up with incorrect revenue figures, which can be misleading and detrimental for investors, stakeholders, and management. 

Proper customer rebate accounting impacts:

• Compliance 
• Financial reporting 
• Financial statements 
• Performance evaluation 

With rebate accounting software, you can remain confident that all your rebate accounting needs are being handled in a timely, secure, and proper manner. By eliminating manual spreadsheets and disparate data, everything you need is neatly stored in a central location. 

The software can perform transaction matching in minutes, rather than hours and days, and cross-reference documentation as needed. Rebate calculations are always correct according to the rebate program, so you never have to second guess the accuracy of your financial information. 

What are the Types of Customer Rebates?

There are a few different types of customer rebates that you can offer. They include:

1. Volume Rebates

Volume rebates are intended to promote the mass purchase of goods by offering tiered rebate rewards at each level. For example, the nominal or percentage rebate amount increases as a customer purchases a larger quantity of goods. 

2. Product-Specific Rebates

This type of rebate is offered when trying to drive interest in a certain product, such as a new product launch or when trying to offload inventory of older goods. It means that only certain products are applicable for a rebate. 

3. Sales Rebates

Sales rebates are similar to volume rebates in the way that their rebate value increases. However, rather than the rebate value increasing due to volume, it increases based on sales value, or amount. 

4. Flat Rebate

The most popular form of a rebate, and perhaps the most straightforward, is a flat rebate where a nominal or percentage value is offered based on a total spent or purchased quantity. 

What is the Impact of Customer Rebates on Financial Statements?

The goal of customer rebates is to boost profits, of course. No matter how a customer rebate program performs, it is going to impact the business’ financial statements. 

It affects revenue recognition and expense reporting. Proper accounting for rebates is critical so that investors and stakeholders have an accurate view of the company’s finances. 

For accounting teams, this means that they have to adjust income statement entries to lower sales revenue according to the rebate amount or increase expenses to reflect the outflow of rebate payments that are made. 

Businesses that offer rebates can leverage rebate accounting software to handle the ins and outs of rebate accounting. It’s vital to carefully track and project rebate redemptions to better understand profit margins. Additionally, by properly accounting for rebate programs, companies can assess whether or not they are worth offering to customers. 

What is Vendor Rebates Accounting Treatment?

Vendor rebates exist so that companies can better manage their supplier rebate programs. The rebate will specify the terms in which the company qualifies for a rebate if they reach the target sales of a product or service. A third party provides the rebate to the business that is offering services or goods to another business or customer.

In terms of accounting, the service provider must recognize the rebate as income. An example makes this easier to understand. Let’s say a utility company is offering a rebate to customers who install solar panels. The company installing the solar panels is paid by the customer to perform the service.

The company will offer the customer this discounted rate (equal to the rebate) upfront. Then, the utility company will pay the installation company the rebate. In this case, that rebate is considered income because it’s the missing amount that the customer would’ve paid for the service that was performed.

What are Unclaimed Rebates?

In many cases, rebates are offered but go unclaimed. It doesn’t mean that the accounting for them goes out the window. Instead, you have to still record unclaimed rebates as you would do so for claimed rebates.

Depending on the state in which you operate, you may have to report unclaimed rebates.

How to Account for Coupons?

Accounting for coupons is dependent on when money is received thereby affecting revenue. If you’re a retailer that offers a coupon (discount) at the point of purchase, then it is considered a reduction in revenue.

If you offer a coupon for a future purchase, then the coupon only affects revenue at the time the next purchase is made using the coupon. It won’t be accounted for until a purchase with the coupon is made because it could be the case that the customer with the coupon doesn’t end up buying anything again or using it.

How to Pay Rebates to Vendors?

Since there are different types of supplier rebates, rebate accounting depends on timing. Let’s look at the example of a volume rebate. A buyer agrees to purchase a certain number of units from a supplier over a year’s time. When the purchase volume hits the mark, the percentage rebate will be issued.

At this time, the vendor will provide the rebate to the customer. In turn, COGs remains untouched (because the purchase price didn’t change), but the rebate will affect net sales. It is then considered to be a reduction from gross revenues.

What are Accounting Challenges of Vendor Rebates?

As you can see from this article already, rebates accounting gets complicated because of the various types of rebates in existence and the nuances for each type.

Some common challenges when accounting for rebates include:

1. Understanding Agreements

For starters, everyone involved in accounting for rebates needs to understand the rebate agreements. This can become chaotic if a business has sales teams in different regions who are running different rebate programs. The rebate must be understood and communicated in its entirety so that anyone involved in its accounting knows the terms and calculations.

2. Tiered Rebates and Accruals

In the case that a rebate is only offered based on a certain volume or value threshold, the data must be properly tracked. Since one calculation relies on a previous calculation, everything needs to be recorded and accessible.

If you do this manually and across spreadsheets, you run the risk of missing data or misplacing information that you need. By choosing to use a rebate management automation solution, then you can rest assured knowing that rebates are being calculated in real-time and automatically. This way, you won’t miss any data or suffer from manual data entry errors.

3. Financial Statements

Rebate accounting must be performed properly to ensure the accuracy of financial statements. If balance statements and sub-ledgers are off, then business decisions are affected and audit concerns may be raised. Errors in balance sheets can lead to negative impacts for the following year and create a domino effect of adverse outcomes.

4. Financial Periods

Expenses and revenues must be matched in the same accounting period. Everything from purchasing and rebate agreements to sales depends on financial periods. If a mistake is made in terms of when a rebate is recorded, it could become too late to rectify it.

5. Lack of Standardization

Your accounting team should opt to standardize its rebate accounting across the organization. When multiple people are managing rebates manually, this becomes difficult to accomplish and can cause discrepancies.

6. Hard to Scale

Manually accounting for rebates also becomes hard to scale because people only have so much bandwidth. Couple that with the fact that your accounting team is also managing a million other things, and you’ll quickly see that a financial automation tool is needed.

A rebate automation solution enables scaling as it automatically processes rebates for your team. No matter how simple or complex your rebate programs are, the automation solution can run calculations, produce reports, and streamline information.

How Can Rebate Tools Help with Accounting for Vendor Rebates?

Rebate tools exist to alleviate the burden of manually accounting for rebates. Rebate management solutions pull all required data and automate processes. Rebate software can combine with your existing systems and ERP to apply customized rebate rules for calculation, reconciliation, and reporting.

This allows your team to allocate their time to high-value tasks rather than repetitive and time-consuming data entry duties. The software automates processes and reduces errors making it possible to scale your rebate accounting as needed and incorporate new customers along the way.

Additionally, you can remove any dependency on spreadsheets and key personnel as the system will run seamlessly regardless of the person who is sitting behind the screen.

The Bottom Line

Accounting for vendor rebates can be streamlined and efficient with the aid of rebate management software. Your business can continue to offer incentives to drive sales without having to worry about how to account for, reconcile, and report rebates because the software will do it for you.