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Accounting for Vendor Discounts

INQUIRY: I received a vendor discount when I paid the invoice early on a FFP (Firm Fixed Price) contract and I do not know how to enter that into my accounting system under DCAA regulations. 


RESPONSE: FAR states the contractor is responsible for having a system in place for seeking and taking advantage of cash discounts, trade discounts, quantity discounts, rebates, and freight allowances.  FAR 31.205-26 (b), Material Costs states:

(b)   The contractor shall-

(1)   Adjust the costs of material for income and other credits, including available trade discounts, refunds, rebates, allowances, and cash discounts, and credits for scrap, salvage, and material returned to vendors; and
(2)   Credit such income and other credits either directly to the cost of the material or allocate such income and other credits as a credit to indirect costs.

What would I do? I would reduce the cost of the materials through a credit entry (usually a general journal entry) in your accounting system to the account where the original entry was posted.  Many accounting software have specific options to apply discounts received and taken.  Use the help feature of your software to search for “discounts”.

Alternately, you can track all credits in one account and reduce/credit one of your indirect cost pools. 

When the contractor can demonstrate that failure to take cash discounts was reasonable, the contractor does not need to credit lost discounts.

Paul Sr.

COMMENTS: Members, please feel free to use the Online Forum to provide comments/feedback addressing this issue and to provide additional clarification and/or actual case information for colleagues.

Disclaimer: Information provided is based on our experience, training, and judgment in interpreting the practical application and intent of official guidance and regulations.  It does not represent the official position of any government agency or their representative.