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Definition: Vendor Allowance
Vendor allowance is incentive which vendors give to the end-retailers or stakeholders which are directly involved in the sale of the products or services which the vendor or manufacturer is related to. These vendor allowances can be in form of cash or other types of incentives. The retailers may get allowance from multiple vendors and vice versa.
Rebates and allowances are received because of attaining defined purchase levels or sales and are accrued over the rebate program period based on the terms of the vendor arrangement over the incentive period and estimates. These estimates are generally reviewed on a quarterly basis and adjusted for changes in anticipated product sales. Initially allowances and volume-based rebates which are earned are recorded as a reduction in the cost of merchandise inventories and are included in operations as a reduction of cost of goods sold in the period where the related product is sold.
Vendor allowances generally should be recorded in the accounting records over the life of a related agreement for both the paying and receiving entities. For example, if Vendor C agrees to give Retailer D an upfront payment in exchange for a five-year exclusive supplier agreement, this revenue is generally amortized across each year of the exclusivity agreement, even though Retailer B collects the money in full in the first year.
Retailers have been known to deceive their vendors. Vendor allowance frauds may be perpetrated by retailers in order to meet earnings expectations or be perpetrated by rogue buyers to meet goals for product lines or departments. The retailer may also intentionally mislead their accounting department about “side deals,” such as exclusivity agreements, thus inviting company accountants to book revenue too soon.
The retailer receives a vendor allowance of Rs. 5 per item on additional amount sold above the agreed minimum quantity as specified in the agreement. This motivates the retailer to increase the profits by selling more and is also sustainable because it also motivates the seller to buy more to increase profits.