Discount Allowed
What is Discount Allowed?
A discount allowed is a discount offered to a customer who has bought goods.
![da1](https://seeaccountingnow.online/wp-content/uploads/2021/07/da1.jpg)
How it Works
Trade Discounts
Sometimes, a business will offer a trade discount to encourage resellers to buy more.
![da2](https://seeaccountingnow.online/wp-content/uploads/2021/07/da2.jpg)
For example, a reseller may sell 10 units of a product at $100 per unit, which results in a total sale of $1000.
![da3](https://seeaccountingnow.online/wp-content/uploads/2021/07/da3.jpg)
As a reward, the business may allow a discount of 10% on the total sale.
![da4](https://seeaccountingnow.online/wp-content/uploads/2021/07/da4.jpg)
This means the buyer only has to pay 90% of the sale price.
![da5](https://seeaccountingnow.online/wp-content/uploads/2021/07/da5.jpg)
How to Account for a Trade Discount
With a trade discount, you don’t record the original sales amount.
![da6.1](https://seeaccountingnow.online/wp-content/uploads/2021/07/da6.1-1.jpg)
Instead, you record the sale net of the discount.
![da7](https://seeaccountingnow.online/wp-content/uploads/2021/07/da7.jpg)
You show that the sale’s value came from sales.
![da8](https://seeaccountingnow.online/wp-content/uploads/2021/07/da8.jpg)
Then, you show the goods went to a particular customer.
![da9](https://seeaccountingnow.online/wp-content/uploads/2021/07/da9.jpg)
Cash Discounts
A business may offer a cash discount if a customer pays early.
![da10](https://seeaccountingnow.online/wp-content/uploads/2021/07/da10.jpg)
In this case, the customer buys goods on credit.
![da11](https://seeaccountingnow.online/wp-content/uploads/2021/07/da11.jpg)
This means, they can pay later.
![da12](https://seeaccountingnow.online/wp-content/uploads/2021/07/da12.jpg)
However, the customer may be allowed a discount if they pay earlier.
![da13](https://seeaccountingnow.online/wp-content/uploads/2021/07/da13.jpg)
In this case, they will pay the sales price less the discount amount.
![da14](https://seeaccountingnow.online/wp-content/uploads/2021/07/da14.jpg)
How to Account for a Cash Discount
A customer may or may not pay earlier.
![da15](https://seeaccountingnow.online/wp-content/uploads/2021/07/da15.jpg)
Because of this, you record the sale’s full value when the sale is made.
![da16](https://seeaccountingnow.online/wp-content/uploads/2021/07/da16.jpg)
Then, you show that the value of goods went to a particular customer.
![da17](https://seeaccountingnow.online/wp-content/uploads/2021/07/da17.jpg)
Now, suppose the customer pays ahead of time.
![da18](https://seeaccountingnow.online/wp-content/uploads/2021/07/da18.jpg)
They are entitled to a discount.
![da19](https://seeaccountingnow.online/wp-content/uploads/2021/07/da19.jpg)
So they will pay what they owe, net of the discount.
![da20](https://seeaccountingnow.online/wp-content/uploads/2021/07/da20.jpg)
To record the transaction, you credit accounts receivable.
![da21](https://seeaccountingnow.online/wp-content/uploads/2021/07/da21.jpg)
This shows the money came from the customer.
![da22](https://seeaccountingnow.online/wp-content/uploads/2021/07/da22.jpg)
Then you debit the checking account.
![da23](https://seeaccountingnow.online/wp-content/uploads/2021/07/da23.jpg)
This shows that the money went to the bank.
![da24](https://seeaccountingnow.online/wp-content/uploads/2021/07/da24.jpg)
Next, you need to account for the discount.
![da25.1](https://seeaccountingnow.online/wp-content/uploads/2021/07/da25.1.jpg)
To do this, you credit accounts receivable with the discount.
![da25](https://seeaccountingnow.online/wp-content/uploads/2021/07/da25.jpg)
This shows that you have removed the remaining value of money owed from accounts receivable.
![da26](https://seeaccountingnow.online/wp-content/uploads/2021/07/da26.jpg)
Then you debit discount allowed
![da27](https://seeaccountingnow.online/wp-content/uploads/2021/07/da27.jpg)
This shows that that value was used for discount allowed.
![da28](https://seeaccountingnow.online/wp-content/uploads/2021/07/da28.jpg)
The discount allowed account is a contra revenue account.
![da29](https://seeaccountingnow.online/wp-content/uploads/2021/07/da29.jpg)
In other words, it is classified as a revenue account.
![da30](https://seeaccountingnow.online/wp-content/uploads/2021/07/da30.jpg)
But because it balances on the debit side, it is said to be contra account.
![da31](https://seeaccountingnow.online/wp-content/uploads/2021/07/da31.jpg)
© R.J. Hickman 2021