Discount allowed and discount received
/What is Discount Allowed and Discount Received?
A discount allowed is when the seller of goods or services grants a payment discount to a buyer. This discount is frequently an early payment discount on credit sales , but it can also be for other reasons, such as a discount for paying cash up front, or for buying in high volume, or for buying during a promotion period when goods or services are offered at a reduced price. It may also apply to discounted purchases of specific goods that the seller is trying to eliminate from stock, perhaps to make way for new models.
A discount received is the reverse situation, where the buyer of goods or services is granted a discount by the seller. The examples just noted for a discount allowed also apply to a discount received.
Example of a Discount Allowed
Bluebird Electronics sells laptops to a retailer, Local Tech, for $10,000 with payment terms of 2/10, net 30 (which means a 2% discount is available if payment is made within 10 days). Local Tech makes the payment within the 10-day period, qualifying for the discount. The 2% discount equates to a payment reduction of $200, so the final payment made by the buyer is $9,800. Bluebird Electronics records the $200 as a discount allowed, reducing its revenue but encouraging early payment.
Example of a Discount Received
Local Tech, the retailer, purchases smartphones from a supplier, Mobile Distributors, for $5,000 under the same payment terms (2/10, net 30). Local Tech pays within 10 days to take advantage of the discount. The 2% discount equates to a payment reduction of $100, so the final payment made by Local Tech is $4,900. Local Tech records the $100 as a discount received, which reduces its cost of goods purchased.
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Accounting for the Discount Allowed and Discount Received
When the seller allows a discount, this is recorded as a reduction of revenues , and is typically a debit to a contra revenue account. For example, the seller allows a $50 discount from the billed price of $1,000 in services that it has provided to a customer. The entry to record the receipt of cash from the customer is a debit of $950 to the cash account, a debit of $50 to the sales discount contra revenue account, and a $1,000 credit to the accounts receivable account. Thus, the net effect of the transaction is to reduce the amount of gross sales . The journal entry for this sample transaction appears next.
When the buyer receives a discount, this is recorded as a reduction in the expense (or asset) associated with the purchase, or in a separate account that tracks discounts. To continue with the last example from the perspective of the buyer, the buyer debits the accounts payable account for $1,000, credits the cash account for $950, and credits the early payment discounts account for $50. In many cases, it is easier not to recognize a discount received, if the resulting information is not used.
