How do I Process Discounts, Refunds and Rebates?

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1 1/5 How do I Process Discounts, Refunds and Rebates? 1. Introduction. 2. Discounts. 3. Invoice Discounts. 4. Payment Discounts. 5. Invoice Refunds. 6. Cash Refunds. 7. Rebates. 1. Introduction: You need to give careful consideration to these types of transactions as there is always a danger that you might fall foul of the Tax legislation in some instances. The advice given in this Article is of a general nature and should not be counted on as definitive in this regard. In the case of the UK you can find advice and guidance on these matters at the following Web Sites which also deals with Coupons and other types of Promotions; Get Basic Advice here and get Extended Advice on this Hyperlink. Other Countries and/or States will also have similar published advice available. In a number of cases, as well as considering the Tax implications, you will need to consider whether the Transaction will affect the Customer s or Supplier s Account i.e. will it reduce the amount you are owed or you owe according to the Ledger, or is it a separate Cash/Bank transaction which doesn t affect the Debtors (A/C Receivables) Creditors (A/C Payables)? Also, how does it affect Sales Analyses and Stock positions? 2. Discounts: In general Discounts will have both Tax and Ledger implications and relate to Discounts given or received on foot of Transactions entered into the Supplier or Customer Account. Two different types of Discount are facilitated in the System; - Discount opportunities presented at Invoice Line Item level (and Credit Notes), and, - Discount opportunities presented on Payment or Receipt Entry. 3. Invoice Discounts: There are two ways in which Discount can be applied to Invoices at Invoice Line Item level; (ii) Use of a Discount Rate (%) to be applied to any or all the Lines on the Invoice or Credit Note. Use of a discrete Discount Amount on each of the Item Lines. In the case of the former, the Discount Rate, in decimal form (0.05 corresponds to 5%), is held on the Supplier s or Customer s Master record (on the Finance Tab ) in which case it will be subsequently applied to all that Supplier s or Customer s Invoices and Credit Notes for all Item Lines - but which can be overridden later at Transaction entry stage.

2 2/5 Alternatively, it can be recorded at Invoice or Credit Note entry stage on the Supplier s Invoice Header Defaults Tab, or, in the case of Customers, on the Invoice Header Details Tab, and will apply to all Lines on that particular Invoice or Credit Note only (i.e. it will not be recorded permanently on the Supplier or Customer record). It can, of course, also be overridden on any Invoice or Credit Line Item. Discount Rates or Amounts can be over-ridden at data entry stage for each individual Line on an Invoice or can be added to any Invoice Line even if not present on the Suppliers or Customer Record or on the Invoice Header Tabs; In the case of the latter use of a Discrete Discount Amount, the exact Discount Amount can be entered against some Item Lines on the Invoice or Credit Note as data entry progresses;

3 3/5 Discounts entered at Invoice (Credit Note) Line Item level will carry Tax at the same rate as that of the Line item itself. That is to say that if a Discount for is entered it will be deemed to carry the same rate of tax as the Undiscounted amount, and so, will not only reduce the total price on the Line Item, but will also reduce the Tax Amount on the Line Item as well. For example, if the Line Item Amount, before Discount is and the Tax Rate is 5%, then the Total Line Item amount before Discount is If Discount is now entered in the Amount of (10% off the before Discount Amount) this will produce a final Line Item Amount of since the Discount Amount of will also attract the same Tax Rate of 5% (2.50). Or, to put it another way, the Discounted Amount of will attract Tax of 5%. These Line Item level Discounts will only serve to reduce the overall Income or Cost of Sales for that line item and will not raise an additional Discount Transaction (see 4. below). In this example, will be posted to the relevant Accounts Receivable or Accounts Payable Control Account, will be posted to the Tax Control Account and will be posted to the relevant Revenue (Income) or Cost Account in the General Ledger. They will also have an effect on the value of Sales Analyses but will not have an impact on the Stock levels. 4. Payment Discounts: The second type of Discount is more in the nature of an Early Payment Discount or such similar. In this case it is not possible for the Discount to be analysed against a specific Cost or Revenue Account in the General Ledger as it relates to the overall Invoice (remembering that there will be several differing Line Items on the Invoice). It is therefore analysed to special GL Accounts which are set up in Codes Maintenance General System Accounts known as Discount Received or Discount Allowed. In addition, while these types of Discount do affect the Ledger, there are no Tax implications since the tax is computed from the Invoices and Credit Notes rather than the Payments or Receipts, and there are also no implications in terms of Sales Analyses or Stock; In this instance additional transactions are raised (Type = DP or DS ) in the Accounts Receivable or Payables Ledger and are automatically posted to the Customer or Supplier Account and are Allocated against the selected Invoice in the same way as normal Payments or Receipts. The Discount inclusive Amount is analysed to the Accounts Payable (Creditors) or Accounts Receivable (Debtors) Control Account, the Nett Payment to the selected Bank Account GL Code and the Discount to the Discount Received or Discount Allowed GL Accounts. You can also use this facility to enter a Discount Amount only. Simply leave the Pay Amt. field blank, select the Transaction against which the Discount is to be Allocated and enter the Discount Amount against that Transaction. Now Select the Process option at the bottom of this Window.

4 4/5 5. Invoice Refunds: With Refunds you need to consider several factors; (ii) (iii) Have Goods been returned? Is the Refund in respect of an Invoiced Sale or Purchase because of Defects, Poor Service, etc.? Has the Account been fully paid? Is the Refund purely a Cash transaction unrelated to a Sale/Purchase Invoice (e.g. Compensation, or un-related Damage)? 5.1 If the Refund relates to a Sale or Purchase and the Account is still open, then you should just issue a Credit Note (or Product Credit Note, if applicable) to this effect which will impact both the Ledger and the Tax. Subsequent Receipts or Payments will take account of the Credit Note and the Invoice when allocated. This will also rectify the Sales Analyses and only affect the Stock position (if relevant). The Credit Note can lie on the Account awaiting subsequent transactions, or you can proceed as in 5.2 below. 5.2 If the Refund relates to a Sale and the Account has been fully settled, you need to issue a Credit Note on the Account (to account for the Tax and to have impact on the Gross Sales or Purchases in the General Ledger). On the assumption that the Account is expecting no further transactions against which the Credit Note can be off-set, then you then you need to manually process a Cheque Payment or Bank Transfer in the amount of the Refund. The difficulty here is that the System does not accommodate Payments to a Customer or Receipts from a Supplier. Therefore you need to create two new GL Accounts Customer Refunds and Supplier Refunds. In the Bank System create a Sundry Receipt or Payment against the appropriate Refund GL Account. In the Sales or Purchase system you then create a cancelling Debit or Credit Journal quoting the appropriate GL Refund Account. The Debit or Credit Journal can then be allocated to the Customer/Supplier Credit Note. 6. Cash Refunds: Sometimes Customers can overpay an Account or you may have a Claim against a Supplier unrelated to a Purchase (for example damage to Property during a Delivery). These, and other such Refunds will give rise to Cash Payments or Receipts. In the case of the former you obviously want the settlement to be reflected in the Customer s Account. With the Customer s agreement you might decide to let the overpayment lie on the Account awaiting

5 5/5 further transactions or you can proceed by manually processing a Bank Cheque or Transfer in the amount of the overpayment and then follow the steps outlined in 5.2 above. In the case of the latter you might decide to deal with it outside the Account altogether. If not, create a Debit Note on the Supplier Account and when you receive the Remittance proceed as in 5.2 above. 7. Rebates and Similar Commercial Arrangements: Examples are Long Term Agreement incentive Payments or Receipts, Supplier supports a Promotion, Coupons and Vouchers, Free Gifts of Product or Services, Loyalty Cards, etc. Most of these will have Tax Implications and some will have Stock considerations. Therefore you should consult the available advice from the Tax Authorities or your Accountant/Auditor.