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Accounting for cashback and discounts

Accounting for cashback and discounts

PUBLICATIONS \ 19.03.2021

To begin with, it should be noted that the terms “discount” and “cashback” are not legislatively defined; however, in practice, these tools are often used to increase clients’ loyalty to an organization and to increase their number. 

We can highlight the following types of marketing tools to encourage buyers:

  • a discount in the form of a reduction in the price of the good;
  • a goods bonus (free receipt of a certain quantity of goods similar to that purchased by the buyer);
  • various gifts;
  • a bonus to the buyer.

By and large, cashback is the same bonus to the buyer, in cash form.

Let us consider the accounting of cashback on the part of the seller and the buyer.

On the part of the seller, the procedure for reflecting cashback transactions is similar to that for transactions for paying bonuses to the buyer without reducing the price of goods.

The seller includes the cash bonus (cashback) provided to the buyer in its tax accounting as part of its non-operating expenses, provided that the following conditions are met (sub-clause 19.1, clause 1, article 265 of the Tax Code of the Russian Federation):

  • the bonus is provided for by the contract in return for the buyer’s fulfillment of certain (specific) terms of the contract (for example, the number of purchases);
  • this kind of bonus does not change the price of the goods in question.

In addition, a number of additional restrictions are established regarding alimentary goods (Letter No. 03-03-07/49936 of the Ministry of Finance of Russia dated August 26, 2016):

  • the bonus amount, together with the promotion, logistics, packaging and similar services for these goods, should not exceed 5% of their price (excluding VAT and excise taxes);
  • bonuses are not allowed for staple foods according to the list established by the Government of the Russian Federation.

In the seller’s accounting, the accrual of cashback is reflected in the debiting of cost accounts, for example, accounts 44 “Sales expenses”, by the following entries:

  • 44–62(76) – the buyer’s bonus is accrued;
  • 62 (76)–51 – the buyer’s bonus is paid (cashback is transferred).

It should be noted that the accrual of cashback does not affect the calculation of VAT; therefore, it does not require the additional drawing up of invoices.

In the buyer’s tax accounting, receiving cash back is reflected as part of its non-operating expenses; in its accounting, the receipt of cashback is reflected by the following entries:

  • 60 (76)–91 – a notification from the supplier about receiving cashback (a cash bonus) is obtained;
  • 51–60(76) – cashback (a cash bonus) is obtained.

A discount, in contrast to cashback, usually involves a change in the cost of the goods.  The possibility of the supplier changing the price of goods or a service on terms stipulated in the contract is fixed in the Civil Code (clause 2 of article 424).

Also, it should be remembered that a price variance by more than 20% towards a reduction or increase of the level of prices applied by the organization for identical goods within a short period of time can draw attention from the tax authorities, which have the right to check whether the prices of transactions are correct (sub-clause 4 clause 2 of article 40 of the Tax Code of the Russian Federation). If a variance is detected, they can charge additional taxes and fines.

As a justification for the provision of a discount, the seller can issue such documents as:

  • a marketing policy of the organization;
  • an approved list of clients who receive discounts;
  • an order of the chief executive  approving price lists for the entire assortment of goods sold, including at a discount;
  • an order reducing the price of seasonal or stale goods;
  • an order of the chief executive for a promotional campaign;
  • a sale and purchase agreement with the contractor or a separate agreement that is an integral part of it, etc.

The discount can be provided: at the time when goods are sold and after the sale of goods – with regard to future or past purchases.

THE SELLER’S ACCOUNTING

In the event that the discount is granted before ownership of the goods transfers to the buyer, the revenues from the sale of the goods are recognized as income from core activities in the amount of the contract price, taking into account the discount provided (clauses 5, 6.5 of PBU 9/99). In the accounting, these transactions are reflected in the standard way:

  • 62–90.1 – revenue from the sale of goods is recognized, taking into account the discount provided;
  • 90.3–68 – VAT is accrued on the revenue, taking into account the discount provided;
  • 90.02–41 (43) – the actual cost price of the goods (the finished product) is written off.

If the discount was granted to the buyer after ownership of the goods transferred, the accounting depends on whether the discount was granted before or after the end of the year in which the sale occurred.

When a discount is granted in the same year as that in which the sale occurred, adjusting transactions are made in the accounting:

  • 62–90.1 – revenue from the sale of the goods is recognized;
  • 90.3–68 – VAT is accrued on the revenue;
  • 62–90.1 – REVERSING ENTRY – revenue for previously shipped goods is reduced by the amount of the discount provided;
  • 90.3–68 – REVERSING ENTRY – the VAT amount is reduced – this entry is made on the date when the seller issues the adjustment invoice.

If the discount is granted after the end of the year in which the sale occurred and the reporting for the previous year has already been submitted, then under such conditions, the discount provided should be reflected as part of other expenses:

  • 91.2–62 – losses of previous years associated with the provision of a discount to the buyer are identified;

As of the date when the adjustment invoice is issued:

  • 68-62 – VAT is accepted for deduction from the amount of the discount provided.

We would also like to note an important point if at the time when a discount is provided the buyer has paid for the goods in full, and the seller does not return to the buyer the difference that arose as a result of the discount. In such a case, this difference will be considered an advance payment for upcoming deliveries. This, in turn, obliges the seller to calculate VAT on the amount of the advance payment received.

THE BUYER’S ACCOUNTING

In the accounts of the buyer, as well as in those of the seller, the moment when a discount is granted is important: before the transfer of ownership or after.

If the discount is granted before the property is taken into account, it is entered in the records at the cost specified in the supplier’s shipping documents, taking into account the discount provided. Consequently, in accounting, these are the entries:

  • 41–60 – the goods are registered at the cost, taking into account the discount provided;
  • 19–60 – incoming VAT is reflected.
  • 68–19 – VAT is accepted for deduction.

If the discount is granted after the transfer of and payment for the goods, the buyer has to reduce the purchase price of the goods. The reference to the fact that the cost of material assets is not subject to change does not apply in this case. The Ministry of Finance adheres to this opinion in its explanations.

If the goods for which the discount is provided are in storage (not yet sold), then the following reversing entries are made in the buyer’s accounting:

  • 41–60 – REVERSING ENTRY – the cost of the goods is reduced by the amount of the discount provided;
  • 19–60 – REVERSING ENTRY – the amount of debt, which falls on the amount of VAT from the discount provided, is reduced;
  • 68–19 – REVERSING ENTRY – the amount of VAT declared for deduction is reduced.

For goods already sold, it is necessary to reduce the amount of recognized expenses in the accounting:

  • 60–90.02 – the cost of goods sold is adjusted by the amount of the retro-discount provided by the supplier (excluding VAT);
  • 60–68 – The input VAT accepted for deduction and related to the amount of the discount is restored.

If the discount was granted in the year following the year of the sale and purchase of the goods, and the reporting has already been submitted, then the discount provided is reflected as part of other income, and the following entries are made in the accounting:

  • 60–91.1 – the cost of goods sold is adjusted by the amount of the retro-discount provided by the supplier (excluding VAT);
  • 91.2–68 – the input VAT accepted for deduction and related to the amount of the discount is restored.

We considered the accounting of discounts and cashback in the event that both parties are legal entities but separately we would like to talk about a quite common situation when cashback is received by a natural person, for example, an employee of an organization (an accountable person), or this person paid part of the expenses using bonuses or miles that had been gained.  What amount should be reimbursed in this case, and what should be included in the expenses?

If the employee paid for the purchase with personal bonuses, the organization has the right to reimburse to the employee only the part of the cost that was paid in money. Also, it is the amount paid by the employee in money that the organization has the right to take into account for the purposes of profit taxation. If the head of the organization decides to reimburse to the employee the full cost of the purchase, then personal income tax should be deducted from the part paid for with bonuses; in addition, insurance premiums should be accrued on this part. 

Therefore, accounting for discounts and various bonuses has many nuances and its own special characteristics. We hope that our article has helped you to understand the main points and answered most of the questions that arise.

Anzhelika Maksimova

Accountant