How to Handle Discounts in Accounting

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The two main discounts a company offers its customers are trade discounts and cash, or sale, discounts. Trade discounts are deductions from the list price the company gives to wholesale customers to preserve their advantage over retail customers or for ordering in large quantities. Sales discounts encourage customers to pay quickly by offering a small discount if they pay an invoice within a stated time. For example, an invoice might include the terms "2/10", which means the customer may deduct a 2 percent discount if paying the bill within 10 days of the invoice date. Accountants treat the two types of discount differently in the financial records.

Trade Discounts

Deduct the trade discount from the list price when preparing the invoice, so the invoice shows the discounted price.

Debit accounts receivable, and credit the sales account with the full invoice amount when you enter the invoice in the financial records.

Credit accounts receivable, and debit the bank or cash account with the customer's receipt.

Cash or Sales Discounts

Show the discount terms on the invoice, but do not deduct the discount from the invoice price. The customer only receives the discount if he pays within the stated time.

Debit accounts receivable, and credit the sales account with the full invoice amount when you enter the invoice in the ledgers.

Debit the bank or cash account with the amount the customer pays. If the customer takes the discount, debit the sales discounts account with the amount the customer deducted from his payment. Credit accounts receivable with the original, full invoice amount.

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