Rebate Accounting: Procedures, Challenges & Solutions

When it comes to rebate accounting, there’s a lot to know in order to get it done right. While you’re likely familiar with the concept of a rebate, we are going to break down the different types of rebates to determine the proper accounting procedures. From a vendor rebate accounting entry to customer rebates accounting, this guide will cover all you need to know.

At the same time, we will cover the common challenges that rebate accounting can cause. With it, we offer how automation solutions can easily help to overcome hurdles and streamline rebate accounting procedures.

Coming Up

What is a Rebate?

What are Supplier Rebates?

What are the Types of Rebates?

What is an Example of a Rebate?

How to Account for Customer Rebates?

How to Account for Vendor Rebates?

How to Account for Unclaimed Rebates?

How to Account for Coupons?

How to Pay a Rebate to a Vendor?

What is Inventory Rebate Accounting?

What are the Benefits of Inventory Rebate Accounting?

What are the Challenges of Rebate Accounting?

How to Improve Your Rebate Accounting Processes?

How Automation Improves Rebate Accounting?

How Does SolveXia Help Rebate Accounting?

Closing Thoughts

What is a Rebate?

A rebate is a retroactive payment back to a buyer of a good or service. After the sale has been made, the rebate lowers the full purchase price by returning either a lump sum or percentage of the sales price back to the buyer.

In some instances, rebates are offered only when a certain purchase volume has been met. This condition makes sense because a rebate is intended to increase the volume of purchases.

Rebates can be granted on behalf of businesses directly to customers or on behalf of suppliers. We’ll cover both types below so that your rebates accounting entry can be recorded accurately.

What are Supplier Rebates?

Businesses can sell products or services with supplier rebates. In this case, the supplier will provide the money back to the customers. From a business’ perspective, both your expenses and costs of goods sold will be reduced from this kind of rebate.

Supplier rebates can come into play in different contracted ways. Let’s look at these supplier rebate examples:

1. A supplier might offer rebates only to businesses that make purchases over a certain dollar amount.

2. Suppliers can offer rebates to vendors that fulfill a target percentage increase in the number of products sold.

3. Suppliers can provide end-user rebates, in which case the customer has to apply for a rebate directly on the supplier’s channels, rather than the vendors.

What are the Types of Rebates?

Rebates can be a creative way to boost sales. As such, there are different types of rebates. Here are a few commonly used rebate setups:

1. Volume Incentive Rebate

One of the most common types of rebates is a volume incentive rebate. This rebate protects vendors in the event that they don’t end up selling as much as they had hoped. Buyers receive rebates only once they’ve hit volume-based turnover targets (i.e. bought a certain amount of product in a given amount of time).

2. Value Incentive Rebate

As opposed to calculating rebates based on pure volume, a value incentive rebate is achieved when buyers reach value-based turnover targets (i.e. a certain dollar amount has been reached).

3. Product Mix Incentive Rebate

If you’re a vendor who is looking to diversify the types of products your customers are buying from you, then a product mix incentive rebate may help. The goal would be to win the business from your customer over competitors. For example, you might offer a rebate for TVs under the condition that the customer also purchases computer equipment from your business.

Keep in mind, the above is an abbreviated list of rebate types.

What is an Example of a Rebate?

Let’s consider a simple example of a rebate that states a customer can receive a rebate for buying a specific volume of a product in the time that the rebate is offered (a volume incentive rebate).

For example, if a customer purchases over 10 units of paint (priced at $10 a pint) from a paint store within a quarter, then they can receive a 5% rebate. Once the customer buys their 11th pint of paint, then they can get the rebate, which would mean that they actually spent $9.50 on each unit.

How to Account for Customer Rebates?

Now that we’ve covered the basics of rebates, we are going to dive into how to account for rebates. This is where things can get challenging, but they don’t have to be. There are finance automation solutions that can track rebates and accounting processes so your team doesn’t have to manually do so. The use of such solutions will increase efficiency, save time, and reduce errors.

Sales rebates go back to the customer. If the rebate is being paid by the supplier to the customer, then the vendor accounts for this rebate as a reduction from the cost of goods sold (COGS).

For example, HP (the supplier) may offer a customer rebate that Best Buy lists on their computers. Best Buy isn’t reducing the price, the manufacturer is. To Best Buy, this reduction in the wholesale purchase price relates to its cost of goods sold.

How to Account for Vendor Rebates?

In some cases, rebates are considered income. This happens when a business provides a service to another business or directly to a customer, and there’s a vendor rebate being offered by a third party. An easy example of this is when a company installs solar panels and the utility company is offering a rebate.

The customer will pay the vendor directly for the installation service. The customer will fill out the rebate information for the service provider. The service provider will discount the price of installation in exchange for the income they’ll receive from the utility company (third party), which is considered income.

How to Account for Unclaimed Rebates?

A lot of rebates go unclaimed, which begs the question: how do you account for them? You should record them just like you would for claimed rebates. It might also be required to report unclaimed rebates according to your state’s commerce rules, which goes to the state controller.

How to Account for Coupons?

Rebates should not be confused with coupons. Rebates are retroactive. Coupons are discounts on existing or future purchases that take place at the time of purchase. But, the accounting for coupons depends on the timing of payment itself.

For example, if a coupon discounts the price immediately, then it’s recorded as a reduction in revenue. If the coupon is offered for a future purchase, the coupon will again reduce the revenue when used for a later purchase. Essentially, the rule is that a coupon gets recorded as revenue reduction only when it is used.

How to Pay a Rebate to a Vendor?

Manufacturers often offer rebates to vendors when they meet a certain purchase volume in a period of time. Let’s say that a vendor agrees to purchase 10,000 units of a product from a manufacturer within 6 months. Once they do so, the manufacturer will offer a 10% rebate.

This rebate gets passed along to the buyer. For the manufacturer, revenues need to be adjusted with a reduction, whereas the COGS remains the same. The net sales are affected as they realise a deduction from gross revenues.

What is Inventory Rebate Accounting?

Inventory rebate accounting is intended to determine the value of rebates held in your inventory of goods. Depending on when you record rebate earnings, the way you can track earnings and expenses will be affected. 

For example, if you are a distributor that buys from a supplier, then you may receive a rebate once you purchase a certain volume of goods. If the rebate gets recorded at the point of sale, then that rebate value is recognized as revenue when the product gets sold to your customers. 

On the other hand, if the rebate is earned at the point of purchase, then it is considered a reduction in the cost of the inventory at the time it is purchased. 

Depending on how it’s recorded, the accounting that follows will be different. 

What are the Benefits of Inventory Rebate Accounting?

Inventory rebate accounting helps companies to better track the profitability associated with their sales. The revenue is accounted for when it is earned, rather when the goods are purchased. 

However, to properly account for inventory rebates, companies must have clear procedures set in place. Account automation software helps to ensure standardization, scalability, and accuracy of the processes set in place so that you can maintain proper oversight of profits. 

What are the Challenges of Rebate Accounting?

As you can see (and probably knew already), rebate accounting can get tricky. There are various types of rebates, and the different conditions affect the books in many ways.

Some common challenges of rebate accounting include:

1. Communication Issues:

Sales and marketing teams may offer rebate incentives that the accounting team then has to account for. However, if there’s any miscommunication or misunderstanding about the terms of the agreement or amounts, the accounting team can end up making costly mistakes. With a rebate management system, however, the rebate deal can originate in the system so that there’s a clear understanding on behalf of everyone involved.

2. Accruals Management:

Without reporting, analytics, and forecasting, you may be privy to errors when trying to manage accruals in rebate accounting. An accrual is the expectation of income at a future time.

For rebates that occur with volume or value over time, each prior purchase must be properly tracked. Tiered incentives rely on one another, so you’ll need to keep track of accruals accurately to ensure the timely payment and amount of a rebate.

As you can tell, with more customers and sales, the harder this will become to do manually. Rebate management systems will keep track of everything for you with utmost accuracy and provide you with historical data so you can forecast properly. Rebate management software will prevent manual errors and allow your team to scale accruals management.

3. Balance Sheet Errors:

When rebate accounting goes wrong, it can affect your business’ balance sheet and raise audit concerns. This can have negative financial effects on your future business practices. If you are expecting your accounting team to track all rebates manually and across spreadsheets, you inherently heighten the risks of mistakes.

4. Rebate Agreements: 

Every rebate is based on an agreement that has been made. However, if the rebate agreement is unclear or leaves room to subjectivity, issues may arise. 

This is not only true of the understanding between internal and external parties, but it is also necessary between the commercial teams (i.e. marketing and sales) and the accounting department. Everyone must be aligned when it comes to the agreement so that accounting can properly execute inventory rebates. 

5. Stock Management: 

When a supplier provides a rebate for stock, then the value of the stock for that product must be lowered. This has to be tracked and accrued on the balance sheet. It’s crucial because rebate in stock can’t be released to the profit & loss statement until the inventory has been sold. 

For one item, this may be possible to track manually, but as inventory rebates grow across different products, it become highly complex and error-prone. That’s why software solutions like SolveXia come in to streamline tracking and recording of rebates tied to stock. 

6. Profit & Loss Releases: 

Only once stock is sold can it be released for the profit and loss statement. As a result, accounting teams really have to stay on top of sales and tie each rebate to the relevant items. 

As alluded to above, the manual tracking of these rebates becomes much too cumbersome, especially since the finance team has so much on their plate to manage already. 

7. Setting the Financial Time Period: 

Financial periods set the tone for how companies trade and manage business. Entries must be slotted and recorded within the right time period to make informed business decisions. 

If a closed period has inaccuracies, it will be a domino effect of issues into each subsequent period. Proper rebate accounting can prevent this from being the case. 

How to Improve Your Rebate Accounting Processes?

Even if your rebate accounting process isn’t running as smoothly as you’d like it to, the good news is that there is always room for improvement. 

By focusing on clear communication, processes, and documentation, it’s possible to optimize rebate accounting procedures. Take time to assess your current process and note where inefficiencies reside, or where information may be slipping through the cracks. A surefire way to overcome challenges is to implement a finance automation solution to fill in the cracks. 

With finance automation technology like SolveXia, you can streamline workflows, prevent bottlenecks, and remove key person dependencies. 

Your business gets to save time, eliminate errors, and gain confidence knowing that financial information is always accurately stored and recorded.

How Automation Improves Rebate Accounting?

Finance automation tools have created more agile and accurate accounting teams that get to focus their time on high-level tasks while allowing software to handle the repetitive and data-heavy tasks.

When it comes to rebate accounting, rebate software provides many benefits for rebate management, including improved precision, time savings, enhanced customer service, spreadsheet elimination and more.

Rebate automation software collects information from business systems to manage rebates in real-time. It can be used to model and forecast, calculate rebates, track rebates, process rebates, and analyse rebates.

With access to rebate management software, every team member gains transparency and visibility into what’s working versus what needs to be amended. This way, businesses can maximise their revenues and boost customer satisfaction. Businesses who use rebate management software no longer have to worry about accrual management, rebate reporting, or financial statements because the automation software takes care of all of these crucial business functions.

Besides handling the manual work for you, the rebate software can serve as a business intelligence tool with its suite of analytics and reports that let you identify how to optimise rebates.

How Does SolveXia help Rebate Accounting

SolveXia is a cloud-based automation platform that connects data across your existing systems and calculates rebates with ease. Once implemented, SolveXia can help to improve customer relations, drive more sales, and save your finance team time and errors. 

Executing and managing rebates proves to be a very tedious process, when done manually. While sales and marketing teams offer rebates to boost sales, it’s the finance team that ends up having to take on the extra load of work to execute rebates successfully. 

With SolveXia, no challenge is too great to overcome. From the start, the rebate agreement is clearly understood and documented so everyone is on the same page across internal departments. Then every sales that is tied to a rebate is recorded automatically, so nothing slips by. 

SolveXia turns rebates into a growth engine with visibility, reporting, and automated workflows to successfully account for them.

Closing Thoughts

Rebates can become complex, but rebate accounting doesn’t have to be. With the aid of rebate automation software, your business can easily manage rebates, increase sales, improve margins, and provide improved customer service.  

The common challenges relate to the management of manual, often spreadsheet-based processes. With rebate automation software, you can improve the timing, accuracy and quality of calculations and reporting.  

Want to see how it can help you? A tool like SolveXia supports a series of use cases that have demonstrated ROI results in less than 3 months. Here are two examples; a major beverages company and a pharmaceutical organisation - the first automated 57 different spreadsheet processes and the second fixed its rebate verification issues. Learn more or book a demo.