Product rebates are an incentive that induces customers to purchase a company’s goods. Accountants have the responsibility to properly record rebate transactions into the company’s general ledger. Companies that offer product rebates incur a liability, because customers who turn in rebates often expect to receive cash or gift cards worth a specific dollar amount.
Generally accepted accounting principles state that rebates are a reduction in sales, not a selling expense. Therefore, companies must account rebates when selling goods. For example, say a company sells widgets for $5 each, and a planned 20 percent rebate is coming to induce higher sales. If the company sells $100,000 in widgets after the rebate takes effect, it must record $80,000 in sales and $20,000 in liability for rebate claims in the general ledger.
Breakage represents the amount of rebates a company expects customers will not redeem. Unredeemed rebates are an increase to sales, because the company will earn this money when the rebate period expires. Companies estimate breakage prior to issuing a new product rebate. The common estimation method is to review previous rebate offers and compute a historical percentage of unredeemed rebates.
Journal Entry Examples
Rebate transactions have a few different journal entries. When selling goods that include rebates, accountants must debit accounts receivable or cash, credit sales for the net sales amount and credit liability for rebate claims. When a rebate comes in, the company must debit liability for rebate claims and credit accounts receivable or cash, depending on how the customer paid for the products. Once the rebates have expired, accountants debit the liability for rebate claims and credit sales to recognize the rebate’s actual breakage amount.
The liability for rebate claims appears on a company’s balance sheet. The account typically falls under current liabilities, because the company expects to pay out the rebate funds within the next 12 months. A disclosure may be necessary to explain the rebate process to financial statement users. The disclosures are an addendum to the balance sheet and contain descriptive information on how the company expects to operate the rebate program, including the estimated breakage amount.
- Intermediate Accounting; David Spiceland, et al.
- Financial Accounting Standards Board: Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)
How to Calculate Net Revenue
Net revenue is a business and accounting term that refers to a company's sales after accounting for such items as rebates, returns...
How to Record Journal & General Ledger for Purchases
Recording purchases in a general journal requires multiple entries which can become confusing. This confusion can lead to an error when transferring...
How to Record Vehicles Purchased on Credit in Accounting
When a business buys a vehicle using credit, the balance sheet will show an increase in both assets and liabilities. Over time,...
How to Handle Rebates in QuickBooks
When you offer cash payments or credits as rebates to customers who meet predetermined criteria, you must record this information in QuickBooks...
How to Account for Fixed Assets With GAAP
Proper accounting of assets is essential to a company's financial reporting. In accordance with generally accepted accounting principles, or GAAP, a company...
Accounting for Sales & Cash Receipts
Sales and cash receipts drive the success of any business. The business needs sales to bring in money, build profits and fund...
The Best Bank Incentives
In an increasing competitive financial services environment, banks use incentives to retain customers, increase new accounts and encourage customers to use services...