Trade discounts and sales discounts are the two main types of discounts in accounting that might occur in businesses. Trade discounts take place when the seller reduces the sales price for a wholesale customer, such as on bulk orders. Sales Discounts is a contra revenue account that records the value of price reductions granted to buyers in order to incentivize early payments. Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days. For example, a company ships products that are slightly out of specification.
As seen in the journal entry made above, the sales discount was recorded as a debit because it has a natural balance that is opposite to the natural credit balance of revenue. Expenses too are debits but in this case, the sales discount is recorded as a debit because it is a contra-revenue account and not an expense. Usually, it involves allowing customers to repay the company at an earlier date.
Products
If the transaction involved a cash refund, the only difference in the entry would involve a credit to Cash instead of Accounts Receivable. The Sales Returns and Allowances account is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted. Remember, the credit terms (or terms) provides information to the buyer about when the invoice is due and if there is a discount allowed for paying the invoice early. The discount is not recorded until payment is received because the seller does not know if a buyer will take the discount or not. Discounts are recorded in a contra-revenue account called Sales Discounts.We will be reducing the amount owed by the customer (accounts receivable) and increasing sales discounts (if any) and cash. This section explains how to record sales revenues, including the effect of trade discounts.
- Sales discounts are recorded in a contra revenue account such as Sales Discounts.
- It results in bad debts expense, which is estimated based on the creditworthiness of the buyer and the company’s previous experience with that customer and credit sales.
- The sales discount is based on the sales price of the goods and is sometimes referred to as a cash discount on sales, settlement discount, or discount allowed.
A contra-revenue account is not an account that is shown in the entity’s Financial Statements. It is simply a placeholder account that the entity uses to keep track of their discounts. When preparing the year-end financial form 8834 qualified electric vehicle credit vs for .. statements, the contra-revenue account is netted from the Revenue account, resulting in a Revenue figure net of all discounts. When subtracted from revenue, COGS helps determine a company’s gross profit.
Accounting Terms: XYZ
Subtract the total sales discounts from the gross sales revenue you earned in the period before accounting for discounts. Report your result as “Net sales” below the sales discounts line on your income statement. The amount of net sales is the actual revenue you earned after accounting for discounts. Using the previous example, assume you had $20,000 in gross revenue during the period. You will find the sales number as part of equity, netted against expenses.
Examples of sales discount as a contra revenue account and not an expense
This is most common when the sales discount amount is so small that separate presentation does not yield any material additional information for readers. As seen, the sales discount is a contra-revenue account that appears as a $10 reduction from the gross revenue of $1000 that the manufacturer reported, resulting in net revenue of $990. However, the company also offers a sales discount of 10% if the customer pays within the next ten days. The customer avails of the sale discount and reimburses Red Co. within eight days. Therefore, the company will record the sales discount with the following journal entries.
How to account for a sales discount
The Sales Returns contra revenue account provides the business owner with vital feedback in regard to not only financial data but also his/her business processes. Gross sales is the total unadjusted income your business earned during a set time period. If you use this method, you would credit accounts payable and debit purchases for the invoice amount.
Delivery Expense
Sales discount is debited as a contra revenue account and not as an expense. However, the accounting for sales discount applies when customers avail the reduction in the owed amount. We had 40,000 pounds of beef without a local customer, so we sold it to a company 1,000 miles away for the local price of say $1.50 per pound. Sellers record sales returns and sales allowances in a separate Sales Returns and Allowances account.
At the time of a sale, record the discounted invoice amount in your accounting journal. Debit the accounts receivable account by the discounted invoice amount to increase this account by the amount you expect to collect. When a customer fails to pay its invoice in time to receive a discount, you must record the forfeited sales discount as separate revenue.