What is Discount Allowed?
A discount allowed is a discount offered to a customer who has bought goods.
How it Works
Sometimes, a business will offer a trade discount to encourage resellers to buy more.
For example, a reseller may sell 10 units of a product at $100 per unit, which results in a total sale of $1000.
As a reward, the business may allow a discount of 10% on the total sale.
This means the buyer only has to pay 90% of the sale price.
How to Account for a Trade Discount
With a trade discount, you don’t record the original sales amount.
Instead, you record the sale net of the discount.
You show that the sale’s value came from sales.
Then, you show the goods went to a particular customer.
A business may offer a cash discount if a customer pays early.
In this case, the customer buys goods on credit.
This means, they can pay later.
However, the customer may be allowed a discount if they pay earlier.
In this case, they will pay the sales price less the discount amount.
How to Account for a Cash Discount
A customer may or may not pay earlier.
Because of this, you record the sale’s full value when the sale is made.
Then, you show that the value of goods went to a particular customer.
Now, suppose the customer pays ahead of time.
They are entitled to a discount.
So they will pay what they owe, net of the discount.
To record the transaction, you credit accounts receivable.
This shows the money came from the customer.
Then you debit the checking account.
This shows that the money went to the bank.
Next, you need to account for the discount.
To do this, you credit accounts receivable with the discount.
This shows that you have removed the remaining value of money owed from accounts receivable.
Then you debit discount allowed
This shows that that value was used for discount allowed.
The discount allowed account is a contra revenue account.
In other words, it is classified as a revenue account.
But because it balances on the debit side, it is said to be contra account.
© R.J. Hickman 2021