Monday, 10 August 2015

Accounting for cash (sales) discounts

Let's see how the credit term of 2/10, n/30 works in an example.
Michael & Co Ltd. ships $1,000 of goods to a customer. If the customer pays Michael & Co Ltd. within 10 days of the invoice date, the customer is allowed to deduct $20 (2% of $1,000) from the purchase of $1,000. In other words, the $1,000 amount can be settled for $980 if it is paid within the 10-day discount period.
In the situation when the buyer is paying the account payable to Michael & Co Ltd. for $1,000 early enough to receive a 2% discount, the following entry is made by the buyer:
Account Titles
Debit
Credit
Accounts Payable
1,000

      Purchases Discount

20
      Cash
980
On the other hand, in the case when we are receiving payment from the Customer for a $1,000 account receivable early enough to offer a 2% discount, the seller would make the following entry:
Account Titles
Debit
Credit
Cash
980

Sales Discount
20

      Accounts Receivable
1,000
The method of recording the cash (sales) discounts is called the Gross Method.


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