7. Accounting for Discounts Flashcards
Define a trade discount.
A trade discount is a percentage discount deducted from the list price of goods owing to the nature of the trading transaction.
How does a trade discount affect the invoice received/sent from a supplier/to a customer?
If a trade discount is received by a business for goods purchased from a supplier, the amount of money demanded from the business by the supplier will be net of discount.
If a trade discount is given by a business for goods sold to a customer, the amount of money demanded of the customer by the business will be after deduction of the discount.
How are purchases and sales accounted for with trade discounts?
What about early settlement discounts?
Purchases should be recorded net of trade discounts received from suppliers.
Sales should be recorded net of trade discounts given to customers.
Trade discounts should be deducted before any early settlement discount is calculated.
What is an early settlement discount?
Businesses often offer discounts to credit customers to encourage them to settle amounts owed more quickly.
These are known as early settlement discounts, prompt payment discounts or sometimes cash discounts.
How are sales accounted for with early settlement discounts?
What is the key challenge?
Sales should be recorded net of early settlement discounts taken by customers.
However, at the point of invoice, when the sale is recorded in the accounting system, the business does not know whether or not the customer will take the early settlement discount offered.
Therefore, when the sale is recorded, the business should determine whether they expect the customer to take the discount, or not, based on their knowledge of the customer and whether the customer has previously taken advantage of such discounts, and record the sale accordingly.
In the case of recording a sale with an early settlement discount, what should a business do if a customer does not behave as expected?
If, when payment is made, the customer does not behave as expected, e.g. does take a discount when they were not expected to, the accounting records are adjusted to reflect the full gross value of the goods sold.
What is the accounting treatment for early settlement discounts when the discount is offered to a customer and it is expected to be taken?
What if they do not behave as expected?
Deduct the amount of the discount when recording the revenue and receivable.
If payment is not received within agreed terms and discount is not taken, increase revenue by the amount of the discount.
What is the accounting treatment for early settlement discounts when the discount is offered to a customer and it is not expected to be taken?
What if they do not behave as expected?
Do not deduct the amount of the discount when recording the revenue and receivable.
If the discount is unexpectedly taken, reduce the revenue and receivable accordingly.
What is the accounting treatment for early settlement discounts when the discount is received from a supplier and it is expected to be taken?
What if the payment is not made with agreed terms of the discount?
Deduct the amount of the discount when recording the expense and the payable.
If the payment is not made within agreed terms and discount is not received, increase they expense by the amount of the discount.
What is the accounting treatment for early settlement discounts when the discount is received from a supplier and it is not expected to be taken?
What if the discount is unexpectedly taken?
Do not deduct the discount when recording the expense and payable.
If the discount is unexpectedly taken, reduce the expense and payable accordingly.
