Accounting for Rebates on Fixed Assets
Rebates are the amount of cash that suppliers pay back to the customers to boost the sale.
Rebate is one of the marketing tools that the company uses to encourage the customers to purchase the products.
It sounds similar to the sale discount, but it is not really the sale discount. The sale discount will allow the customers to pay less than the full price base on the percentage of the discount. Another type of discount is the early settlement discount which suppliers provides a discount if customer make full payment after a certain period.
On the other hand, the rebate is actual cash that suppliers pay back to the customers after the transaction is completed. It means the supplier will charge the full price and the customer has to settle the full price as well. After a certain period, the supplier will pay back the rebate amount to the customers.
We all know how expensive car payments can be, which is why it’s no wonder that more and more people are looking into rebates. A rebate offers the buyer some cash back on their purchase or lease if they agree to buy from a certain manufacturer – so not only do you get your money back but also an additional incentive.
If you are buying a new car, then your dealer may offer some cash back as an incentive to buy. The amount of this rebate varies depending on the type and brand of vehicle. It is that they are selling but in general, will be worth around 10% off their retail price so don’t forget about taking advantage. You can either get all the money at once or use part towards the down payment too.
The customers will receive rebates in form of cash, but they cannot record it as income or gain. It should reduce the purchase price of fixed assets. It is the incentive that the supplier provides to the buyer, so it means that fixed assets are costed less than the full price.
Journal Entry for Rebate on Fixed Assets
The rebate that company receive will reduce the cost of fixed assets recorded on the balance sheet. The amount of fixed assets must exclude the rebate amount. In simple terms, the cost of a fixed asset is equal to the purchase price less the rebate.
Cost of fixed asset = Purchase price – Rebate
The journal entry is debiting fixed assets and credit accounts payable or cash paid.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 000 | |
| Accounts Payable | 000 |
The entry will increase fixed assets and accounts payable on the balance sheet. We can see that rebate is omitted from the entry. We record only the net amount in the financial statement.
In real practice, the supplier may demand the customer to make full payment before payback the rebate.
The journal entry is debiting fixed assets, rebate receivable and credit cash paid.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 000 | |
| Rebate Receivable | 000 | |
| Cash | 000 |
The transaction will record the net amount to fixed assets which are the same as the prior entry. The different amount is recorded as rebate receivable on the balance sheet alongside with full cash paid amount.
When the supplier payback the rebate amount, we simply reverse the rebate receivable and cash receipt. The journal entry is debiting cash and credit rebate receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Rebate Receivable | 000 |
Example
Company ABC purchases a new car from Tesla Inc cost $ 120,000. The car dealer provides a rebate of $ 5,000 after the full settlement. The company makes full payment to the supplier. And after a month, the supplier payback the rebate amount. Please prepare an accounting record for a rebate on the purchase of car.
It is the rebate that the supplier payback to the customer only after the full payment is made. The company has to record fixed assets – car only $ 115,000 ($ 120,000 – $ 5,000) on balance sheet. However, the supplier requires us to settle the full payment, so we have to record the rebate receivable.
The journal entry is debiting fixed assets $ 115,000, rebate receivable $ 5,000 and credit cash paid $ 120,000.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets – Car | 115,000 | |
| Rebate Receivable | 5,000 | |
| Cash | 120,000 |
It will increase the fixed assets $ 115,000 on balance sheet and allow the company to start the depreciation base on the actual situation. Rebate receivable is the current asset that will be reversed when the supplier settles the rebate.
After a month, the supplier settles the rebate to the company. They have to reverse the rebate receivable and record cash received.
The journal entry is debiting cash $ 5,000 and credit rebate receivable $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Rebate Receivable | 5,000 |
Advantage of Rebate on Fixed Assets
- Increase Sales: The rebate will provide benefits to the customers, and it will encourage the buyer to purchase the product. As the result, it also helps the supplier to increase the sale volume.
- Build Consumer base: The rebate encourages the customers to try the new product introduced by the supplier. It helps the supplier to build the consumer basic to try the new product, especially for the newcomer.
- Use by the government to implement the government policy: The government can use the rebate as a tool to encourage the resident to purchase a new car which will benefit the producer as well. In the US, the government tries to increase the use of electric vehicles, so they provide rebate to the customers.
