We entered into a revenue share agreement with a vendor in which we buy the product from them and then sell it. They are entitled to 50% of the revenue, which is then reduced by the cost of the product we purchased. Ex: we sell $40k of widgets for which we paid $5k for. We then owe them $40k x 50% less the $5k, so $15k. How should that be recorded? My thought is it should be the invoice they send us would be COGS for $15k, is that correct or would it be a reduction to sales? Also we have sales commissions on these products for which it sounds like the reps commissions should be reduced. Does that sound correct? I have searched for articles and anything on this and I am coming up with nothing. Thank you in advance for any assistance!
How do I account for a revenue share with a vendor.
Answers
Anon,
Regardless of what you decide in the end, ask your auditor. Generally, they're the expert (on what they will later decide)
Personally, I see it as COGS. It's a variable cogs, but it is COGS. It is not unlike Contingent Rent (which is not contra-revenue...it is rent).
My bias comes from: what does a third-party care about when looking at your top-line? They care about your % of the market. They care about how much customers are compensating your for the widgets. Contra-revenue, in this case, would disguise that and make your operations less transparent. I generally like to reserve contra-revenue for things that affect the net amount that the customer remits to you (returns, discounts, and allowances).
Separate issue: sales commissions. Regardless of how you account for this stuff, your comp plan should account for the treatment appropriately. EG; don't cut commissions in half because the accounting treatment changed. That would not make your sales team happy. Similarly, don't double it for similar reasons. Amend the sales plan to accommodate the (potential) discrepancy between business logic (the amount of net revenue generated by the sales activity, whether through contra-revenue or cogs), and the top-line reporting decision.
Cheers
Keith
Accountants are posting book entries in line with the companies contractually binding agreements and these contracts, and it is ultimately the CEO who signs responsible for these contracts and agreements.
First, I would be careful in the way you interpret the nature of a revenue sharing agreement. Make sure, that it is well understood by all parties concerned, that your company is sharing 50% of the Sales price less the original cost paid. Usually, a 50/50 profit split agreement means, that the profit realized, i.e. 40 - 5 = 35 be split between the two parties.
Whichever way you eventually split your income, the payment to the vendor must be debited against sales and credited to the payable account of the vendor. I would open a separate vendor commission account to avoid unnecessary complications in the reconciliation of the accounts with this vendor Not booking this material payment against sales would distort your company's financial results and make any ratio analysis meaningless. In the worst case, you could even be accused of deliberately overstating the sales volume achieved by your company to mislead some creditors.
Same applies to the question whether this agreement impacts the commission payments to the Sales Staff. It is the CEO's responsibility to make that decision in collaboration with the Manager in Charge of the Sales people and later must be informed before somebody makes an arbitrary decision to reduce their income.
And last but not least, in the sense of supporting all accounting transactions with supporting written documentation, both, the handling of the "revenue sharing" and the handling of "the commission payments" should be supported by written signed instructions from the CEO or the person that has the necessary authorization to do so.
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Accounting