A sales discount is a reduction in the sales price offered to customers, usually to encourage prompt payment or as part of a promotional offer. The manner in which the discount is recorded in the books depends on whether the discount is a trade discount or a cash discount:
- Trade Discount: This is deducted directly from the list price and is not recorded separately in the accounting records. Sales are recorded at net cost after discount.
- Cash Discount: These are offered to customers for early payment and are recorded separately in the books.
Journal Entries for Cash Discount on Sales
Suppose your business offers a 2% cash discount to customers who pay within 10 days. Below are examples of how to record discounts on sales.
1. Recording a Sale and Subsequent Payment with a Discount
Example 1: Sale of Goods with a Discount Offered
Your business sells $10,000 worth of goods on August 1, 2024 with payment terms of 2/10, net 30 (2% discount if paid in 10 days).
Initial Journal Entry on August 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Accounts Receivable A/c Debit | 10,000 | |
| 08-01-2024 | To Sales Revenue A/c | 10,000 |
Explanation:
- Accounts Receivable will debited to reflect the amount due from the customer.
- Sales Revenue will credited to record the income from the sale.
Payment Received within Discount Period
Customer pays within the discount period on August 10, 2024 availing 2% discount.
Journal Entry on August 10, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-10-2024 | Bank A/c Debit | 9,800 | |
| 08-10-2024 | Sales Discounts A/c Debit | 200 | |
| 08-10-2024 | To Accounts Receivable A/c | 10,000 |
Explanation:
- Bank will debited for the amount received after the discount.
- Sales Discounts will debited to reflect the cost of the discount given to the customer.
- Accounts Receivable will credited to clear the amount due from the customer.
2. Recording a Sale with a Discount and Full Payment without Taking the Discount
Example 2: Sale of Goods, No Discount Taken
Your business sells $5,000 worth of goods on September 1, 2024, with identical payment terms (2/10, net 30). The customer pays full amount on September 25, 2024, without taking a discount.
Initial Journal Entry on September 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Accounts Receivable A/c Debit | 5,000 | |
| 09-01-2024 | To Sales Revenue A/c | 5,000 |
Payment Received on September 25, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-25-2024 | Bank A/c Debit | 5,000 | |
| 09-25-2024 | To Accounts Receivable A/c | 5,000 |
Explanation:
- Bank will debited to record the full payment received.
- Accounts Receivable will credited to remove the receivable from the books.
3. Recording a Sale with Partial Payment within the Discount Period
Example 3: Partial Payment with a Discount Taken
Your business sells $8,000 worth of goods on October 1, 2024 with the same payment terms (2/10, net 30). The customer pays $4,000 within the discount period on October 8, 2024.
Initial Journal Entry on October 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Accounts Receivable A/c Debit | 8,000 | |
| 10-01-2024 | To Sales Revenue A/c | 8,000 |
Partial Payment Received on October 8, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-08-2024 | Bank A/c Debit | 3,920 | |
| 10-08-2024 | Sales Discounts A/c Debit | 80 | |
| 10-08-2024 | To Accounts Receivable A/c | 4,000 |
Explanation:
- Bank will debited for the amount received after the discount.
- Sales Discounts will debited to account for the discount given.
- Accounts Receivable will credited to reduce the receivable by the amount paid.
4. Recording a Sale with Payment after the Discount Period
Example 4: Late Payment with No Discount
Your business sells $7,000 worth of goods on November 1, 2024 with the same payment terms (2/10, net 30). Customer pays after discount period on November 25, 2024.
Initial Journal Entry on November 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Accounts Receivable A/c Debit | 7,000 | |
| 11-01-2024 | To Sales Revenue A/c | 7,000 |
Payment Received on November 25, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-25-2024 | Bank A/c Debit | 7,000 | |
| 11-25-2024 | To Accounts Receivable A/c | 7,000 |
Explanation:
- Bank will debited to record the full payment received after the discount period.
- Accounts Receivable will credited to remove the receivable from the books.
These entries show how discounts are recorded on sales, whether discounts are taken or not. Properly recording these transactions ensures that the company’s financial statements accurately reflect the revenue earned and the costs associated with offering discounts.