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 is the treatment if they pay as expected and what is the treatment if they don’t?
Record the sales net of discount in the the revenue and receivable accounts:
- Debit Receivables (net of discount)
- Credit Sales (net of discount)
If payment is received within the terms of the early settlement discount, as expected, then the discount is to be taken so no adjustment to sales is necessary:
- Debit Cash/Bank (cash received net of discount)
- Credit Receivables (cash received net of discount)
If payment is not received within the terms of the early settlement discount, not as expected, then the discount is not to be taken so an adjustment to sales is necessary:
- Debit Cash/Bank (cash received without discount)
- Credit Receivables (net of discount)
- Credit Sales (discount amount)
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 is the treatment if they pay as expected and what is the treatment if they don’t?
Record the sales without the discount in revenue and receivable:
- Debit Receivables (no discount)
- Credit Sales (no discount)
If payment is received outside the terms of the early settlement discount, as expected, then the discount is not taken so no adjustment to sales is necessary:
- Debit Cash/Bank (cash received with no discount)
- Credit Receivables (cash received with no discount)
If payment is received within the terms of the early settlement discount, not as expected, then the discount is to be taken so an adjustment to sales is necessary:
- Debit Cash/Bank (cash received net of discount)
- Debit Sales (discount amount)
- Credit Receivables (net of discount)
What is the accounting treatment for early settlement discounts when the discount is offered by a supplier and it is expected to be taken?
What is the treatment if they pay as expected and what is the treatment if they don’t?
Record the purchase net of discount in the the purchases and payables accounts:
- Debit Purchases (net of discount)
- Credit Payables (net of discount)
If the payment is given within the terms of the early settlement discount, as expected, then the discount is to be taken so no adjustment to purchases is necessary:
- Debit Payables (cash paid net of discount)
- Credit Cash/Bank (cash paid net of discount)
If payment is not given within the terms of the early settlement discount, not as expected, then the discount is not to be taken so an adjustment to purchases is necessary:
- Debit Purchases (discount amount)
- Debit Payables (net of discount)
- Credit Cash/Bank (cash paid without discount)
What is the accounting treatment for early settlement discounts when the discount is offered from a supplier and it is not expected to be taken?
What is the treatment if they pay as expected and what is the treatment if they don’t?
Record the purchase without the discount in the the purchases and payables accounts:
- Debit Purchases (no discount)
- Credit Payables (no discount)
If the payment is not given within the terms of the early settlement discount, as expected, then the discount is not to be taken so no adjustment to purchases is necessary:
- Debit Payables (cash paid with no discount)
- Credit Cash/Bank (cash paid with no discount)
If payment is given within the terms of the early settlement discount, not as expected, then the discount is to be taken so an adjustment to purchases is necessary:
- Debit Payables (net of discount)
- Credit Purchases (discount amount)
- Credit Cash/Bank (cash paid with discount)
