A vendor delivered faulty product on a couple projects, for which we paid full price for the goods. They arranged to provide us full credit for the faulty product to be applied to future purchases, even though they replaced the faulty product at no additional charge. I was planning on handling the accounting for this by crediting cost of goods on the current projects and debiting a receivable for this vendor. I will then process purchases on future projects and charge the full amount toward those projects. But, when payment is made, I will credit cash for the net amount and put the difference toward the receivable. This way, I recognize reduced costs on the projects that received faulty product (which created the credit in the first place), and full cost on the future projects for (where we actually realized the credit upon actual payment to the vendor). Do you agree with this approach?
Vendor credit on future purchases
Answers
First, document the credit (ask for a credit memo from the supplier?).
Second, I would recognize the credit as Other Income via A/R (or some other Receivable account) and recognize the cost of goods (the faulty and replaced items) AS IS. Future purchases and corresponding recording will depend on how the vendor applies THAT credit to their invoices. i.e. sometimes vendors don't issue out the full credit amount one time.
I'd rather NOT skew the cost of the current project and other future project costs. The costs still remains the same....it will be the manner of payment that will change or differ. From another perspective, costs remains the same, it is the CASHFLOW that is affected.