Sales Discount refers to the reduction in the amount due from a customer as a result of early payment. It is treated as a deduction from Sales.
"Sales Discount" is a contra-revenue account; presented as a deduction from "Sales" in the income statement to come up with the "Net Sales". The computation can also be presented in the notes to financial statements.
| Sales | $ 860,000 |
| Less: Sales Discounts | 60,000 |
| Sales Returns and Allowances | 20,000 |
| Net Sales | $ 780,000 |
There are two types of discount: trade discount and cash discount. Trade discount refers to the outright reduction in the price of products sold to wholesalers whey they buy in bulk. Cash discount, on the other hand, is granted to customers for early payment.
Sales discount refers to reduction in the amount due as a result of early payment, hence pertaining to cash discounts. Trade discounts are not recorded as sales discounts. They are removed directly when recording sales. In other words, the amount recorded as sales is always at net of any trade discount.
Credit terms are often stated in the following order: trade discounts, cash discounts, and credit period. For example: 10%, 2/15, n/30. This means that the sale is made with a trade discount of 10%. The customer is given 2% cash discount if he/she pays within 15 days. And, the maximum credit period allowed is 30 days.
When a customer is given a discount for early payment, the journal entry for the collection would be:
| Dr. | Cash | xx.xx | |
|---|---|---|---|
| Dr. | Sales Discount | xx.xx | |
| Cr. | Accounts Receivable | xx.xx |
Because of the discount, the amount collected (Cash) is less than the amount due (Accounts Receivable). The debit made to "Sales Discount" would make the debits and credits equal.
MARCO Company sold merchandise to GREY Corp. for a total sales price of $90,000. The company is given 60 days to pay the amount. However, GREY will be granted 5% discount if it pays within 10 days. The journal entry to record the sale would be:
| Dr. | Accounts Receivable | 90,000.00 | |
|---|---|---|---|
| Cr. | Sales | 90,000.00 |
If the customer paid after the discount period has expired, the journal entry to record the collection would simply be:
| Dr. | Cash | 90,000.00 | |
|---|---|---|---|
| Cr. | Accounts Receivable | 90,000.00 |
However, if the customer paid within the discount period (10 days), the journal entry would be:
| Dr. | Cash (90,000 - 4,500) | 84,500.00 | |
|---|---|---|---|
| Dr. | Sales Discount (90,000 x 5%) | 4,500.00 | |
| Cr. | Accounts Receivable | 90,000.00 |
MARIO Co. sold an equipment with a list price of $60,000 on account with the following terms: 10%, 5/15, n/60. The journal entry to record the sale would be.
| Dr. | Accounts Receivable | 54,000.00 | |
|---|---|---|---|
| Cr. | Sales | 54,000.00 |
The sale is recorded at net of the trade discount (60,000 less 10%). When recording sales, trade discount is always deducted directly from the list price.
If the customer pays within the discount period of 15 days, the journal entry to record the collection would be:
| Dr. | Cash (54,000 - 2,700) | 51,300.00 | |
|---|---|---|---|
| Dr. | Sales Discount (54,000 x 5%) | 2,700.00 | |
| Cr. | Accounts Receivable | 54,000.00 |
If the customer pays after the discount period, then the journal entry would be:
| Dr. | Accounts Receivable | 54,000 | |
|---|---|---|---|
| Cr. | Sales | 54,000 |
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