Discount allowed and discount received
/What is Discount Allowed and Discount Received?
A discount allowed is when the seller of goods or services grants a payment discount to a buyer. This discount is frequently an early payment discount on credit sales, but it can also be for other reasons, such as a discount for paying cash up front, or for buying in high volume, or for buying during a promotion period when goods or services are offered at a reduced price. It may also apply to discounted purchases of specific goods that the seller is trying to eliminate from stock, perhaps to make way for new models.
A discount received is the reverse situation, where the buyer of goods or services is granted a discount by the seller. The examples just noted for a discount allowed also apply to a discount received.
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Accounting for the Discount Allowed and Discount Received
When the seller allows a discount, this is recorded as a reduction of revenues, and is typically a debit to a contra revenue account. For example, the seller allows a $50 discount from the billed price of $1,000 in services that it has provided to a customer. The entry to record the receipt of cash from the customer is a debit of $950 to the cash account, a debit of $50 to the sales discount contra revenue account, and a $1,000 credit to the accounts receivable account. Thus, the net effect of the transaction is to reduce the amount of gross sales. The journal entry for this sample transaction appears next.
When the buyer receives a discount, this is recorded as a reduction in the expense (or asset) associated with the purchase, or in a separate account that tracks discounts. To continue with the last example from the perspective of the buyer, the buyer debits the accounts payable account for $1,000, credits the cash account for $950, and credits the early payment discounts account for $50. In many cases, it is easier not to recognize a discount received, if the resulting information is not used.