What Is Off-Invoice Deduction?

Manufacturers and distributors that focus on large-volume sales use trade promotions as an integral, key component of the way they do business. Trade promotions are marketing activities or economic incentives that encourage customers to buy more of certain products from the same supplier. Trade promotions include advertising rebates, bill-back allowances and off-invoice deductions. Many of these suppliers use off-invoice discounts as their primary form of trade promotion.

With an off-invoice deduction, the manufacturer or distributor decreases a product's cost per the promotion's term. Typically, this involves a decrease for a specified period of time or for a certain amount of product or both. The "off-invoice" deduction actually does appear on the customer's invoice. The term refers to the amount that the deduction takes off of the original product price. Suppliers offer off-invoice deductions as fixed amounts or percentages of original cost.

ABC Distributors may sell a product for $8 each. However, ABC may offer customers a 15 percent discount for order quantities of 400 or more. The invoice would reflect a discounted price of $6.80. This is the original cost of $8 less the discount of $1.20, which is 15 percent of $8.

With generally accepted accounting principles, companies recognize revenues when earned. Typically, suppliers earn revenues upon shipment or delivery of their products when they invoice their customers. Suppliers record the discounted cost on applicable customer invoices at that time. A supplier usually must manage a variety of trade promotions, the actual number of which depends on the number of products it sells, whether it offers tiered quantity discounts and the duration of its promotions.

To effectively set up and maintain off-invoice allowances as a form of trade promotion, companies must ensure a number of processes are in place. This includes recording the correct discount for the right customer, adjusting accounts receivable to reflect the allowances, and tracking dates and promotion length. Therefore, suppliers must install an accounting management system and controls to properly and accurately track and recognize each customer's discount.

Suppliers use trade promotions as incentives to encourage their customers, typically wholesalers and retailers, to purchase large quantities of product. Suppliers also use trade promotions to induce their customers to promote or display a specific product or product line. Sometimes suppliers require their customers to pass on a portion of the off-invoice discount to the end users. Some manufacturers in certain consumer goods industries use trade promotions to drive the sale of more than 90 percent of their production.