How to Record Cash Discount Example

how to record discounts in accounting

Trade discount is not shown in the main financial statements, however cash discount and other types of discounts are shown in books of accounts. Crediting discount received has the effect of reducing gross purchases by the amount of cash discount received. Consequently, payables are debited to reduce their balance to the amount that is expected to be paid to them, i.e. net of cash discount. The sales tax in your state is 6%, making the sales tax due $4.02. The discount afforded to the customer is $6.70, making the sales total for the customer $64.32 ($67.00 + $4.02 less $6.70 from the discount) and $71.02 for XYZ ($67.00 + $4.02).

  • This is an example of how to handle a double-entry bookkeeping journal entry when selling a product or service for cash with no offered discount.
  • Another common sales discount is “2% 10/Net 30” terms, which allows a 2% discount for paying within 10 days of the invoice date, or paying in 30 days.
  • This transaction is more fully explained in our purchases on account example.
  • In this case, if the customer takes the discount by making early payment on the credit purchase, the company needs to account for the sale discount with a proper journal entry.
  • Instead, you simply recognize revenue net of CU 5 discount when a coupon is redeemed.

For accurate accounting, the entries on the debit side and credit side should always balance. At the date of purchase the business does not know whether they will settle the outstanding amount early and take the purchases purchase discounts discount or simply pay the full amount on the due date. In these circumstances the business needs to record the full amount of the purchase when invoiced and ignore any discount offered in the supplier terms.

When you should NOT discount your goods or services

You normally sell Thai cuisine for CU 10, its cost in your inventory is CU 6 and the cost of Thailand travel guide is CU 35. This standard specifies that you should present the revenue net of discounts. We try to explain why discounting is not always that great and how you should decide on the amount of your discount based on your own margins and sales.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on It means that clients will see no difference between your product and other products – they will just buy the cheapest (not necessarily the best).

Leave a Comment

Your email address will not be published. Required fields are marked *

Shopping Cart