Sale Discount Journal Entry
Overview
When making a credit sale, the company may provide a credit term that encourages its customers to pay early by giving the sale discount if the payment is made within a certain period. In this case, if the customer takes the discount by making early payment on the credit purchase, the company needs to account for the sale discount with a proper journal entry.
Likewise, the credit term is usually stated on the sale invoice with the specification of discount percentage and the time period it offers, e.g. “2/10 net 30” or “2/10 n/30”. The “2/10 n/30” here means that the 2% discount on the net amount (gross sale – sale returns) of the invoice price is given if the customer makes payment within 10 days of the invoice date; otherwise, the due date of payment is 30 days of the invoice date.
Sale discount journal entry
The company can make sale discount journal entry by debiting cash account and sales discounts account and crediting accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Sales discounts | 000 | |
| Accounts receivable | 000 |
Sales discounts is a contra account to sales revenues, in which its normal balance is on the debit side. Likewise, the net sales revenue will decrease when the sales discounts increase.
As it is not possible to know when or whether the customers will take the discount in the credit term, the company records the gross sales when it makes the sale on credit. Hence, when the discounts are taken by the customers, the company needs to make the journal entry in sales discounts account to have a fair presentation of net sales revenues.
Example
For example, on October 01, 2020, the company ABC Ltd. sells merchandise for $1,500 to one of its customers on the credit term 2/10 net 30. The company properly records the $1,500 of sales revenues and accounts receivable on October 01, 2020.
What is the journal entry if the customer takes the discount and pays on October 10, 2020?
In another case, what is the journal entry if the customer pays on October 30, 2020, instead?
Solution:
The customer takes the discount
If the customer takes the discount and makes the payment on October 10, 2020, the customer will receive a discount of $30 (1,500 x 2%).
In this case, the company ABC Ltd. can make the journal entry for sale discount on October 10, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,470 | |
| Sales discounts | 30 | |
| Accounts receivable | 1,500 |
The customer pays on October 30, 2020, instead
If the customer makes payments on October 30, 2020, instead, there won’t be any discount as the discount period will already over by then and the customer will need to pay the full amount of $1,500.
In this case, the company ABC Ltd. can make journal entry for the $1,500 cash received on October 30, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,500 | |
| Accounts receivable | 1,500 |