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Q: Accounting for factory rebate ( Answered 4 out of 5 stars,   1 Comment )
Question  
Subject: Accounting for factory rebate
Category: Business and Money > Accounting
Asked by: jwctoo-ga
List Price: $5.00
Posted: 12 Jun 2005 11:22 PDT
Expires: 12 Jul 2005 11:22 PDT
Question ID: 532549
A retailer sells a $2400  lawn tractor to a customer for $2000 after
deducting the factory rebate of $400. The retailer enters the sale as
$2000 when it happens. When the factory credits the $400 to the
retailer, how should the rebate be entered in the books. There are
probably several ways to do this but I would like it to be easy (there
are a lot of them to do) and properly reflect the transaction on the
Income statement and balance sheet. FYI- We're using Windward System 5
software- Great stuff- but they have no advice on this. Thanks. John

Request for Question Clarification by omnivorous-ga on 12 Jun 2005 17:53 PDT
Jwctoo --

Are you aware of recent FASB changes requiring that promotional
discounts like this are actually entered as a reduction in revenues? 
I'm not familiar enough with the FASB changes to understand whether
they apply at only the factory or the retail level as well, but it's
clearly an issue with this question.

Best regards,

Omnivorous-GA

Clarification of Question by jwctoo-ga on 12 Jun 2005 18:23 PDT
I can see that FASB might want the Manufacturer to treat this as a
reduction in revenue, but for the retailer It would be an increase in
revenue (I think)-
   Ive been thinking that one way to handle my rebate question might
be for the retailer to treat the Rebate as a sale to the manufacturer
(with no cost)- then the revenue would reflect correctly and the
rebate would show as all profit (balancing the loss of profit that was
incurred when the rebate was deducted from the original sale). The
receivable then could be used to pay off payables to the same
supplier.
Any comments from accountants on that idea??

Clarification of Question by jwctoo-ga on 12 Jun 2005 18:28 PDT
BTW- I should have mentioned that the rebate is just a credit to the
retailer's account by the manufacturer- no check is mailed by the
manufacturer to the retailer.
Answer  
Subject: Re: Accounting for factory rebate
Answered By: taxmama-ga on 13 Jun 2005 06:23 PDT
Rated:4 out of 5 stars
 
Hi JWC, 

Here's the best way to enter the transaction for the seller.

Set up your invoicing system to recognize the rebate as an accounts receivable. 

Enter the sale as follows:

Sale                  $2,400
Rebates Receivable       400
Payment from Customer  2,000

Why? Well, aside from giving you a good place
to record the rebate when it's issued by the
manufacturer, you'll know how much you have coming
in rebates AND which customer's rebate is missing.

When you get the manufacturer's rebate, you'll record
it as follows:

Debit - Cost of Goods Sold or accounts payable    $400.00
Credit - Rebates Receivable                        400.00

Remember, the rebate is a payment against your
accounts payable to that vendor. So, when they give
you back money, you use it to pay the bill you
owe them. 

Now, if you fully trust the manufacturer to credit 
you for all rebates, and you don't have to deal with
certified audits, then, you could just record the 
rebate you receive as:

Debit - Cost of Goods Sold or accounts payable    $400.00
Credit - Income From Rebate                        400.00 

That way, you won't have to make any adjustments to your
invoices. On the other hand...it will be harder to track
if any rebates haven't been paid to you. 

Does this help?

Best wishes

Your TaxMama-ga

Request for Answer Clarification by jwctoo-ga on 14 Jun 2005 06:38 PDT
Hello Taxmama-
I thought I understood your answer until I got to the details of doing
it- by "Set up your invoicing system to recognize the rebate as an
accounts receivable" Do you mean "set up an asset account in the
ledger for Rebates Receivable" ?
 Does this mean that the customer invoice would somehow show "rebate
receivable" as a payment on the customer invoice or just as a line
item (like a discount) on the invoice?
   The second idea would be OK for this Manufacturer- he's trustworthy
- but the rebate wouldnt be tied to the manufacturer on our books.

Please comment on my idea to "sell" the rebate amount to the
manufacturer and  then use the credit to pay part of his invoice.
Thanks. John

Clarification of Answer by taxmama-ga on 14 Jun 2005 07:41 PDT
Hi JWC

You did mention that. 

Whether there's a physical check or not, 
without the customer using the rebate, you'd
have to pay full price. So your purchase price
IS the price you negotiated with the manufacturer.

The  customer using the rebate triggers the 
credit memo from your vendor.

So, this is these are the entries I would recommend using.

It will give you real income information.
And remember, you do want to ensure that you get 
credit for all the rebates. So this will give you
an easy way to see which rebates have been paid 
and which haven't. All the rebates will be in one
account on your Profit and Loss Statement.

Best wishes

Your TaxMama-ga

Clarification of Answer by taxmama-ga on 14 Jun 2005 14:19 PDT
Hi John,

Sorry, for some reason, I didn't see your note - but saw this instead:

"Clarification of Question by jwctoo-ga on 12 Jun 2005 18:28 PDT 
BTW- I should have mentioned that the rebate is just a credit to the
retailer's account by the manufacturer- no check is mailed by the
manufacturer to the retailer."

Let me answer your question from this morning.

Your question: by "Set up your invoicing system to recognize the rebate as an
accounts receivable" Do you mean "set up an asset account in the
ledger for Rebates Receivable" ?

Yes, set up an asset called Rebates Receivable
and set up an income item - Rebates Income. 

Your next question: Does this mean that the customer invoice would 
somehow show "rebate receivable" as a payment on the customer 
invoice or just as a line item (like a discount) on the invoice?

Pretty much however you want to word it, but, yes.

Do you remember last time you bought a car and there was
a manufacturer's rebate? Or you bought some electronics 
equipment and there was an instant rebate?

The invoice shows the full sales price. Then it shows
the instant rebate. Then it shows the net balance due.

In fact, if you've shopped at a supermarket with a member
card, you'll see the same kind of thing.

Actually, it's kind of a psychological comfort to the 
customer, too. Seeing the rebate on their receipt, they
get to show off just how smart they were, or what a good
bargainer they were.

Also. My point was to design the invoice so that when a
rebate is entered, all the entries will go to the right
place. I am not familiar with your accounting system. 
But QuickBooks calls the line description an 'item'.
In QB, when you set up an 'item' for the invoice, you
tell the program what account to debit or credit. No doubt,
your accounting system does something similar.

You remarked: The second idea would be OK for this Manufacturer - 
he's trustworthy - but the rebate wouldnt be tied to the 
manufacturer on our books.

John, I have no doubt the manufacturer is a good guy.
But he has staff. And staff turns over. There's no guarantee
that all staff will do it right. And if they start sloughing
off, it will be a while before you notice. Believe me, I've
done accounts payable for manufacturers. And temp work for
agencies cleaning up the work of clueless staff.

Don't jeopardize your relationship over trying to over-
simplify an accounting entry.

Your last question:  Please comment on my idea to "sell" the 
rebate amount to the manufacturer and  then use the credit 
to pay part of his invoice. Thanks. John

I am not clear on the question. Do you mean, you want to 
convince the manufacturer just to allow you to net the invoice? 

He might agree. He's still going to want to show the full sale
on his books - if he has bankers or investors looking over his 
shoulder. On the other hand, if he has tax collectors to contend
with, where there is a tax on gross sales (like in the City of 
Los Angeles), he might be very happy to reduce his gross sales.

Good luck!

Best wishes

Your TaxMama-ga

Request for Answer Clarification by jwctoo-ga on 19 Jun 2005 17:54 PDT
I'll try to explain what I meant by "sell to the manufacturer".
Suppose with a rebate due for $400 I entered a new sale on my books to
the manufacturer of 1 rebate  @400.  This would  show on my books 
income of $400- and I would have have a record of this rebate. He
wouldnt have to agree or even know about the transaction. Then when I
bought something from him I could "cross" the $400 Receivable with the
payable to him for $400. He would do the same when he applied my
rebate credit to my purchase. Would this be an OK way to handle the
transaction??

Clarification of Answer by taxmama-ga on 19 Jun 2005 18:48 PDT
Hi John, 

Sure, you could do something like that. 

Just change the way you record the sale so it reads like this:

Sale                           $2,000 Credit
Rebate Sale to Manufacturer       400 Credit
Rebates Receivable                400 Debit
Payment from Customer           2,000 Debit

And you're in balance again. 

How's that.

Got to go now.

Best wishes

Your TaxMama-ga
jwctoo-ga rated this answer:4 out of 5 stars
Good answer and good discussion on followup- very helpful.

Comments  
Subject: Re: Accounting for factory rebate
From: myoarin-ga on 13 Jun 2005 05:58 PDT
 
If the rebate is a reduction in revenues for the manufacturer, who has
billed the retailer and booked a receivable (the latter booking a
payable), then the manufacturer would seem to be fulfilling the FASB
requirement by booking the rebate as a credit to its accounts
receivable for the retailer (debit to sales), who would match that by
a debit to his accounts payable (credit to purchase expenses), thus
reducing his expense for the item, correctly matching the
manufacturer's reduction of its revenues.

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