Rebates are tricky to classify when it comes to a company's accounting. How to classify the rebate depends on who is offering it. Rebates may be offered by the supplier. They may be a price reduction or marketing expense. It's important that rebates are classified appropriately.
What Is a Rebate?
A rebate is a portion of the purchase price of a product or service that a seller gives back to the buyer. It is typically valid for a specified period. Unlike a discount, which is deducted from the purchase price at the time of sale, a rebate is given after you have paid the full price of a product or service.
If your business sells a product or service with a supplier rebate, the rebate is paid to the customer by your supplier. This reduces your expenses and cost of goods sold.
Challenges With Recording Rebates
Not all companies use the same system for recording rebates. Problems can arise with rebate accounting such as a company relying on suppliers to keep track of outstanding rebates, or the supplier becoming privy to a company’s purchase history. There are no accounting standards specific to rebates. For many years, standard practice has been to deduct rebates from the cost of inventory. But if a rebate specifically refunds selling expenses, it wouldn’t be deducted from the cost of inventory. If the rebate is considered a marketing and promotion expense by a retailer, it should be listed in the books that way.
Types of Rebates
If you have an automobile dealership and sell cars with a rebate, you should record the rebate on the purchase of the car as a reduction of the cost of the auto. The lower cost will result in a lower depreciation expense.
If your company is on the receiving end of a rebate for installing energy-efficient equipment, it should be recorded as revenue. Although the rebate is from a third party, and not the company, your expense is still less.
Any inventory-related rebate your company gets should not be recorded until receipt is likely. Once this occurs, the rebate should be recorded as a reduction in the cost of the inventory. If the rebate does not arrive when it’s expected to, it should be recorded as the gross amount. If the rebate arrives after you’ve entered the gross amount, it should be recorded as a discount at that time.
Unclaimed rebates should be reported as unclaimed property unless your customers are other businesses. In that case, some states have exemptions for business-to-business payments. It’s a good idea to check your state laws if this happens.