If a company offers rebates, say 5%, based on a customer purchasing a set amount of goods in a year, does the company offering the rebate have to, by law or by GAAC rules, have to maintain actual monies to cover the cost of those rebates? Thank you.
Accounting For Rebates Payable
Answers
In my experience these rebates were booked as a liability similar to A/P and then cleared or paid when the customer met the requirements to earn the rebate. The payments were sometimes made in cash and in other cases the customer might deduct from an invoice they were paying for goods purchased and explain that they were deducting or short paying for a particular rebate,
Thanks, Bob. I've been advised my an
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GAAP dictates that the POTENTIAL liability needs to be recognized and the amount of which is based on what can be REASONABLY ascertained or estimated or pro rated. This is however NOT in the vein of an AP as an AP is a determined/fixed amount. This operates more like a reserve....but still a liability.
I do NOT agree that actual money MUST to be maintained. The company however can elect to set aside money....but not a must or it is their choice.
How you compute/estimate the amount to be recognized is a trickier subject and depends on the details of your rebate program.
Anon
Are you in an industry where there may be such a regulation (it sounds like a form of trust or escrow account)? If not, I agree with Bob Leonard.
I would accrue the 5% monthly as an expense, then true it up when you actually pay them or issue a credit memo (which is the way you should do it if they owe you money or are past due).
It's key for customer/profitability analysis and pricing decisions.
Thanks, everyone, for your valued input. I think the question of whether actual monies needs to be set aside has been answered by you who are truly qualified: it is NOT necessary to set actual monies aside, but rather account for the amounts of the rebate and hold them on your books as some sort of a liability until they are actual credited or paid. Thanks again.
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" rather account for the amounts of the rebate and hold them on your books as some sort of a liability until they are actual credited or paid."
A slight clarification..... "until they are actually EARNED (in this case, purchased the amount set)." Earning the rebate should transfer the amount from reserve TO ACCOUNTS PAYABLE....from there it is paid.
Remember, you are just setting aside "monies" but the client still has not yet earned it.
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