Rebates are tricky to classify when it comes to a company's accounting. How to classify the rebate depends on who is offering it. These sales incentives may be offered by the supplier and can be issued as a price reduction or marketing expense. It's important for accounting purposes 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's typically valid for a specified period. Unlike a discount, which is deducted from the purchase price at the time of sale, a rebate is a refund a purchaser applies for after paying for a product or service.
Businesses offer rebates to promote their products and entice customers to buy more. The rebate can be provided at the time of payment, or can be something issued after the purchase. These incentives are available only to buyers whose orders reach the specified value or quantity. From an accounting perspective, rebates are not considered taxable income but price adjustments.
Discounts, on the other hand, are available to all customers who purchase specific goods, have a membership card or meet certain criteria, such as subscribing to the company's email newsletter. Additionally, rebates can be offered at checkout, while discounts are applied before customers purchase the products.
What Are Supplier Rebates?
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.
There are different types of supplier rebates and each has unique characteristics. For example, a supplier may offer rebates only to businesses that make purchases of $50,000 to $100,000 during the rebate agreement life. In general, these rebates are paid quarterly. Then the business can pass on these savings to customers.
Suppliers may also provide rebates to vendors that reach a target percentage increase in the number of products sold. For example, if your business sells 15 percent more shoes than usual during the rebate agreement, you may receive a rebate that you can pass on to buyers.
There are also end-user rebates, also known as indirect customer rebates. In this case, the customer needs to apply for a rebate through the supplier's website or by other means that don't involve the vendor.
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 receives 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. In case the rebate arrives after you’ve entered the gross amount, it should be recorded as a discount at that time.
What About Unclaimed Rebates?
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.