Accounting for and recording of purchase bonuses

Sellers and purchasers often agree that if the purchaser purchases in excess of a certain amount or monetary volume, he will receive a discount, i.e. purchase bonus from the purchaser. While such arrangement is extremely attractive from the sales point of view, it creates various questions for accountants: how to record it? which financial indicators do purchase bonuses influence? when to record purchase bonuses?

First, let’s look at purchase bonuses from the purchaser’s standpoint.

Let’s assume that company A purchases materials from company B to self-manufacture its product. A and B agree that if materials are purchased for minimum 500 000 euros in a year, then A will receive 3% purchase discount on all purchases.

In December the purchase manager notices that purchases have been made for 430 000 euros and based on the agreement with B decides to make another purchase in the amount of 80 000 euros.

So, the total amount of purchases of A from B is 510 000 euros and the purchase bonus to be received is 15 300 euros.

In order to understand how to record the purchase bonus in accounting, it is necessary to know how much of the material purchased by A from B is still in A’s stock. Let’s assume that as of 31 December the stock balance of materials purchased from B is 102 000 euros.

Now we need to calculate the ratio between materials sold and still in stock. Materials were purchased from B for 510 000 euros, 102 000 or 20% of it is in stock. Accordingly, the purchase bonus must be recorded in the same proportion:

cost of goods should be decreased by 12 240 euros
stock balance of materials should be decreased by 3 060 euros.

Accounting entry should be the following:

Dt Trade payable or accrued income 15 300
Ct Cost of goods 12 240
Ct Stock balance of materials 3 060

To reconcile the balance of materials in the stock list and in the balance sheet it is recommended to use a separate account in the balance sheet for purchase bonuses concerning in-stock items. According to the Accounting Act inventory is taken of the balances of the company’s assets and liabilities as of the balance sheet date. Accordingly, the purchase bonuses receivable must be recorded according to agreements. Absence of the supplier’s corresponding invoice cannot be the reason why not to record purchase bonuses.

Recording of purchase bonuses by the seller should be based on the same principles. The seller must also take an inventory of his assets and liabilities and take into account the purchase bonuses concerning the financial year then ended when preparing the financial statements. The seller shall make the following accounting entry:

Dt Sales revenue 15 300
Ct Trade receivables or accrued expense 15 300

For the purposes of the Value Added Tax Act purchase bonuses are not turnover and therefore cannot be taxed with VAT.