From Wikicpa
Cash discounts (or sales discounts) are reductions from the invoice price allowed for prompt payment by the customer. It is customary to consider the discount period from the date of the invoice or date of shipment. The discount is allowed if the check is mailed before midnight of the last discount day. (Many company's wanting to build goodwill with their customers will allow the discounts even after the discount day has padded).
Often communicated in terms that read 2/10, N30. Which means a 2 percent discount is available if the invoice is paid within 10 days and the gross is due within 30 days. Companies that fail to take advantage of cash discounts are not using their cash advantageously. A business that receives a 1% discount of their sales price for payment within 10 days, total payment within 30 days, is effectively earning over 18% interest (.01/(20/365)).
Accounting
The most common method used in recording cash discounts is to enter the receivable and sale at the gross amount. Under this method the discounts are recognized only when the payments are received within the discount period. The other method is to use the net amount.
Gross method
- Sale of $15,000, terms are 2/15, N30
| Account Description
| Debit
| Credit
|
| Accounts Receivable
| $15,000
|
|
| Sales
|
| $15,000
|
- Payment of $9,000 received within 10 days
| Account Description
| Debit
| Credit
|
| Cash
| $8,820
|
|
| Sales Discount
| $180
|
|
| Accounts Receivable
|
| $9,000
|
- Payment of $6,000 received after 15 days
| Account Description
| Debit
| Credit
|
| Cash
| $6,000
|
| Accounts Receivable
|
| $6,000
|
Net method
- Sale of $15,000, terms are 2/15, N30
| Account Description
| Debit
| Credit
|
| Accounts Receivable
| $14,700
|
|
| Sales
|
| $14,700
|
- Payment of $9,000 received within 10 days
| Account Description
| Debit
| Credit
|
| Cash
| $8,820
|
|
| Accounts Receivable
|
| $8,820
|
- Payment of $6,000 received after 15 days
| Account Description
| Debit
| Credit
|
| Cash
| $6,000
|
| Accounts Receivable
|
| $6,000
|
| Accounts Receivable
| $120
|
|
| Sales Discounts Forefited
|
| $120
|
See Also
