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On the other hand, cash discounts are discounts that are offered to attract customers for the early settlement of their debts. In the normal course of business, companies might sell goods or services to their customers on credit. Regardless of the credit terms being mentioned in the contract, there are often circumstances where the buyers are not always able to pay back their debts in time. This is because the initial accounting journal entry at the time of sale was a debit to Accounts Receivable asset account and credit to a Sales Revenue account. A contra sales revenue account–such as Sales Allowances, Returns and Discounts-has a debit balance because it is contrary to the credit balance of a regular Sales Revenue account. A & Co. grants a 2% discount to all credit customers if the payment is made within 10 days of the date of invoice.

The following examples explain the use of journal entry for discount allowed in real-world events. The percentage of cash discount is mentioned in the payment terms. For example, the terms 2/10, n/30 mean a 2% discount transaction 2021 will be allowed if the payment is made within 10 days of the date of invoice; otherwise, the full amount is to be paid in 30 days. As you can see the total sales account reflects the sales amount without a discount.

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It requires that the customers pay for the goods or services within the stated period on the invoice in order to get the discount. From the table above, we can see that once the customer takes the discount, the allowance for the sales discount account is debited. Thus, it avoids having to impact the company’s income statement due to the different accounting periods. In order to avoid the challenges that may arise as a result of the invoice and the sales discount payment falling in two different accounting periods, an estimate of what the sales discount will be is recorded.

Cash increases (debit) for the amount owed to CBS, less the discount. The payment terms are 2 ÷ 10, n ÷ 30, and the invoice is dated August 1. On July 1, CBS sells 10 electronic hardware packages to a customer at a sales price of $1,200 each.

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On the other hand, the corporation does not normally debit the sales revenue account directly. To maintain track of the discounts taken by customers, it usually registers such a discount in the discount allowed account. Since the customer already paid in full for their purchase, a full cash refund is issued on September 3.

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Recording Sales Discounts

If a company expects that most of its customers will take the sales discount offered, then it will need to create a sales discount reserve. The sales discount reserve is created based on an estimation of the number of discounts that will probably be taken by the customers. A cash discount may be offered by a seller to a buyer to encourage them to make a payment within a desired number of days. The purpose of cash discount is to encourage buyers to make payments before the due date. Another common sales discount is “2% 10/Net 30” terms, which allows a 2% discount for paying within 10 days of the invoice date, or paying in 30 days. The income statement will reflect the cumulative sales discount amount through a new line item after gross sales.

The income statement will show the cumulative discount amount for the accounting period. The monthly statements will reflect the cumulative figures of allowance for sales discounts on outstanding invoices and the cash received through discounts. In such scenarios, it will be wise for a company to create a contra allowance account for sales discounts immediately. The journal entry for all discount amounts would be shown cumulatively in the “sales discount account”.