How To Record Discounts In Accounting - Definition And Meaning - Explanation

What is Discount In Accounting? | Accounting Treatment Of Different Types Of Discounts

It is an allowance given to buyers to influence them to buy goods / products or services at cheaper prices. Ultimately, it increases the Sales of the business.

Recording of it in Accounting depends upon different types of discounts. The main types of discounts are Purchases Discount, Sales Discount, Discount Received, Discount Allowed, Cash Discount and Trade Discount.

Now, we will discuss about the journal entries related to these specific types.

For Purchases Disc., we record the following entry as shown below:

                                        Accounts Payable a/c  XXX

                                                                           Purchases Disc. a/c  XXX

                                            

For Sales Disc, the entry would be as shown below:

                                        Sales Disc. a/c  XXX

                                                                      Accounts Receivable a/c  XXX

                                            

For Cash Disc., we consider two types of discounts:

(i) For Disc. Allowed, it is a Contra Revenue Account for the business as it reduces the amount of sales account, so we record the following entry:

                                             Cash a/c  XXX

                                            Disc. Allowed a/c  XXX

                                                                               Accounts Receivable a/c  XXX

                                                      

Disc. Allowed is deducted from Gross Sales on Income Statement.

(ii) For Disc. Received from Suppliers of goods, the following entry is recorded:

                                          Accounts Payable a/c  XXX

                                                                             Cash a/c  XXX

                                                                             Disc. Received a/c  XXX

                                                       

Here Discount Received is a Contra Expense Account for the business as it reduces the amount of Purchases Account , so we credit it. Discount Received is deducted form Gross Purchases on Income Statement.

Trade Discount is a reduction in the catalog price given to buyers when they buy in bulk. It is not recorded in the Books of Accounts as it is already settled before recording in the invoice documents exchanged between, company, wholesalers and retailers. For example, if the catalog price for each item of the same product is Rs. 500, then the seller may give 20% trade disc. to buyer. In that case, the net amount, i.e., 500 - (500 X 20/100) = Rs. 400 is recorded by both buyer and seller in the respective invoice documents and there is a no need to create a separate trade discount account.