Discount Allowed & Journal Entries

WHAT IS DISCOUNT ALLOWED ?

Discounts are very common in today’s business world, they are generally provided in lieu of some consideration which can range from timely payments to market competition. Most businesses offer discounts to attract and retain customers. These are called discounts allowed and can be divided into two categories:

 

  • Cash Discounts :- Cash Discount is offered to customers as an incentive for timely payment of their liabilities in respect of credit purchases. They are shown on the debit side of profit & loss account.
  • Trade Discounts :- Trade discounts are included in the list price of goods or services to encourage high-volume sales. This reduction in price is offered to all customers at the time of purchase. These discounts are not shown in the financial statements.

 

In case of a transaction where both trade discount and cash discount are allowed, the trade discount is allowed first and then the cash discount is processed.

 

Discount allowed is  accounted as an Expense of business. 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.

 

JOURNAL ENTRIES FOR DISCOUNT ALLOWED :-

The following journal entry is passed to record discount allowed :-

 

Cash A/c   (Dr )                        xxx

Discount Allowed A/c   (Dr )     xxx

                 To Debtor’s / Sales A/c   (Cr)       xxx

 

FOR EXAMPLE :-

Goods sold worth Rs 10,000 at a discount of 5% . Here, the journal entry to be passed will be :-

 

Cash A/c  (Dr)                       Rs  500

Discount Allowed A/c  (Dr)    Rs  9,500

To Sales  A/c    (Cr)              Rs  10,000

 

 

Thus , in simple words Discount allowed is a reduction in price of goods or services allowed by a seller to a buyer and is an expense for the seller.

 

 

Accounting & Finance for Banking

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