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Accounting For Distributor Incentives

Accounting For Distributor IncentivesWe have regular market promotions to customer. For example, we give distributors a fixed discount for the period. At period end, instead of give them rebate (cash), we give them a number of products (based on the total fixed discount). How should we record such transactions - Should we (a) deduct revenue based on VSOE? (b)should we record the revenue as is (AR), and count those product cost into COS? Or (c) record the cost of those products into a promotional/marketing expense account?


Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

The way I'm reading this, I'd go with (b).
Taking an example: You sell 80 units for a total of $100, (1.25 a unit).
You initially ship 80, then at the end of the period their "discount" kicks in and you ship an additional 20, for a total of 100 units.
While there may be other factors at play, at the end of the period your auditor will see that you shipped 100 units and got paid $100. That smells a lot like $1 per unit, and that all of the units shipped were COGS.

I'm not clear on what you mean by (a).

(c) seems incorrect, since the cost of the units relates directly to the transaction.

(Finance/Accounting) |

Thanks Keith. By (a) I meant the scenario that at end of period, the 20 units were not shipped. Because all those units are identical (same VSOE), I was wondering whether we should just booked $80 revenue (in your example), and book 80 units' worth of COGS, because the additional 20 units haven't be shipped yet, so we defer $20 of revenue and 20 unit's of COGS (matching the revenue and expense). Let me know whether I am thinking correctly for this scenario.

If at period end we shipped the entire 100 units, indeed I agree with you that we should book $100 revenue and 100 units of cost as COGS.

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

I always like to break these things down in to the actual entries that you would be making. It makes it a little easier for me to understand and helps see the relationship of the amounts you are recording.

I would think of it as 2 entries. Assuming a calculated discount of $10. I would Debit "Discounts- Premiums" for $10 and Credit A/R $10. (Discounts should be a contra account in the Revenue section.) Assuming the inventory cost of the items you gave instead of cash was $6, then Debit an account called "Cost of Goods Sold - Premiums" for $6 and Credit "Inventory". I recommend you keep the "COGS -Premiums" for premium giveaway items separate from normal COGS. I would also note that the "Discounts - Premiums" account is differentiated from other discounts for analysis purposes.

Also note that the second entry assumes you have enough information to keep a perpetual inventory and know the actual cost of the item you gave away. Even if you don't have an exact dollar cost, I would make an educated guess as to the cost of the item you gave away so the cost of those items don't get buried in total cost of sales.

Of course I am also assuming you have a pretty good idea of what the giveaway is costing you. But beware, if you don't really know what your giveaway is costing you, you might be negatively affecting your bottom line with this discount routine.

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

From my read I would record the additional products as contra-revenue.

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |


I like Scotts recommendation (it is good to track this stuff).
It seems like it would depend on what your VSOE is....and it also may have an impact on VSOE if people customarily get this discount.
In (a) the deferred revenue seems odd if you're claiming it as a discount. I think it is a nice, clean simple approach, however, I'd consider booking

DR AR; CR Rev for $100 for 80 units
DR Cogs; CR Inventory for 80 units.
DR Cogs-Discounts; CR Accrued discount-Cogs
then when you ship
DR Accrued Discount; CR Inventory

On the theory that they ordered 80 units, and got 80 units, so you earned the revenue. Almost as if you had accrued a discount on those 80 units of the value of the COGS of 20 units...that you pay in inventory instead of cash.

Kate Greenberg
Title: President
Company: KNG Consulting LLC
(President , KNG Consulting LLC ) |

The correct answer is b), with one qualification in regards to timing. The revenue ($100) is debited to AR with a credit to sales when the initial product is shipped (assuming all other rev rec criteria are met). The COS impact would be 1) the actual cost of the product initially shipped plus 2) an estimate the cost of product to be shipped in future (at the end of the year or month, whichever it is). This method is particularly important if the promotional shipments occur in a different month from the initial sale. However, it makes for better housekeeping even if both transactions occur in the same month.

I like the idea of keeping a separate account for this, as Scott mentioned.That way you can track the actual cost of the promotions and not goof up your perpetual inventory. The entry to this account would be a debit to COS and a credit to an inventory reserve for future shipments of promotional product. Sounds like this estimation would be easy since you know what the "fixed discount" amount is. Since you are recording the amount at cost, not selling price, you need to take the amount of the discount, less your average product markup.

Whenever the product actually ships and inventory is decremented (credited), this reserve account is then offset (debited).


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