Bookkeeping 23. Cash Discount On Sales

Question 0

2. How is a Cash Discount On Sales entered on the books?

Answer 0

There are two methods of accounting for sales that offer cash discounts; the gross method and the net method.

Question 1

1. What is a cash discount on sales?

Answer 1

Cash discount is only offered on credit sales where the customers do not pay at the time of sale but promise to pay latter.

Question 2

3. Why would a company offer a Cash Discount On Sales?

Answer 2

Suppose Company A sells certain goods at a price of $4,400 with terms of payment of 2/10 n/20. These terms of payment mean two things. Firstly, the customer must pay within 20 days after sale or, in other words, they have right to postpone the payment up to the 20th day after sale. Secondly, if the payment is made within 10 days, the customer will also be entitled to a 2% cash discount. Since most customers would try to benefit from the cash discount, such a practice encourages customers to pay early.

Question 3

4. How does a company know when to apply the correct method?

Answer 3

Since at the time of sale it is not possible to know whether the customer will actually avail the discount, therefore Company A would choose either gross method or net method. Once it chooses one method it would have to record all sales according to that method.

Question 4

5. Explain the GROSS METHOD.

Answer 4

Gross Method

According to gross method the company would initially record the sale at gross or full price of $4,400. The journal entry would be:

Dr Acc Receivable. 4,400
Cr Sales. 4,400

Question 5

6. GROSS METHOD.
   Subsequently, if the customer pays within 10 days, he would be entitled to avail the cash discount. The journal entry to record payment would be:

Answer 5

Dr Cash 4,312
Dr Sales Discounts 88
Cr Acc Receivable 4,400

Question 6

7. GROSS METHOD.
   However, if the customer does not pay within 10 days, they would not be entitled to avail the cash discount and the journal entry to record the payment would be:

Answer 6

Dr Cash 4,400
Cr Acc Receivable 4,400

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Question 7

8. NET METHOD

According to the net method the company would initially record the sale at net price. Explain:

Answer 7

Net Price = Gross Price − Potential Cash Discount

Net Price = $4,400 − 88 = $4,312

Acc Receivable 4,312
Cr Sales 4,312

Question 8

9. For payment within 10 days, using the Net Method:

Answer 8

Cash….4,312

Acc Rec….4,312

Question 9

10. NET METHOD. For payment after 10 days:

Answer 9

Dr Cash 4,400
Acc Rec…….4,312
Sales Disc Forfeited…88

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