By: Flaka Ismaili    March 23, 2022

Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund. Accounting for sales discounts can be tricky but understanding how they affect your financial statements is essential to stay compliant with generally accepted accounting principles (GAAP). The sales discounts are presented in the income statement as a reduction in sales the same way as sales return and allowances. In the single-step income statement, sales discounts are deducted from sales and presented net off as net sales. A company can offer different types of sales discounts that can affect the sales figures.

• This is to ensure accuracy and balance in the financial records of the company.
• The amount of net sales is the actual revenue you earned after accounting for discounts.
• If a customer takes advantage of these terms and pays less than the full amount of an invoice, the seller records the discount as a debit to the sales discounts account and a credit to the accounts receivable account.
• The best practice to record a sales entry is debiting the accounts receivable with full invoice and credit the revenue account with the same amount.

This means that the buyer can satisfy the $900 obligation if it pays $891 ($900 minus $9 of sales discount) within 10 days. Purchase discount is an offer from the supplier to the purchaser, to reduce the payment amount if the payment is made within a certain period of time. For example, a purchaser brought a $100 item, with a purchase discount term 3/10, net 30. After all, nonprofit business loans accountants define cost as the cash amount at the time of the transaction.A seller would need to debit a sales returns and allowances account and credit an asset account. This journal entry carries over to the income statement as a reduction in revenue. Debit the cash account in a new journal entry in your records by the amount of cash you received from your customer.

In simple words, sales discounts are considered one of the ways to influence customers to do an early payment. This includes the journal entry for sales discounts with or without allowance for sales discount account. Let’s look at some examples of sales discount as a contra revenue account and how it is recorded as a debit contrary to the natural credit balance of revenue. Sales discounts are not only beneficial to the company, but it also benefits the buyer too.

How can You Create and then Add the Discount item to a Particular Invoice?

Subtract the total sales discounts from the gross sales revenue you earned in the period before accounting for discounts. In a situation where a company has offered discounts to several customers, the record for such sale discount will vary from the one given above. If for instance the invoice for a sales discount was offered to customers who made purchases at the end of a month, the customers will pay for these goods in the next month. This will make the invoice and the sales discount fall within two different accounting periods which could pose a challenge for accounting purposes. Based on the matching principle in accounting, any related transactions have to be recorded within the same accounting period. Hence when revenue is reported, any matching expenses have to be reported as well within the same accounting period.

The Sales Discounts, Returns, Allowances contra revenue sales accounts may be presented on the income statement as individual line items or–if immaterial or preferable–aggregated into a single contra-revenue line. This is because the initial accounting journal entry at the time of sale was a debit to Accounts Receivable asset account and credit to a Sales Revenue account. Let’s look at how to account for sales discounts and how they affect your company’s books. The income statement will reflect the cumulative sales discount amount through a new line item after gross sales. Since companies do not know when exactly customers will avail of their discount offer, they can create a contra account for discounts at the time of issuance. Similarly, Sinra PLC will adjust the sales discounts in its income statement through a new line item as well.

Terms that require the buyer to pay the freight bill on arrival of the goods. As stated earlier, a sales discount is a reduction in the price a customer pays for goods or services received. The sales discount is usually offered by companies to encourage early payments for the goods sold or services rendered.

Account Types

Once you have turned on the discount setting, you will witness the discount field right underneath the subtotal on invoices, quotes, or sales receipts. As per prevailing practice or terms of purchase and sale, a certain amount of money determined at a fixed rate and deducted from invoice price or amount receivable is called the discount. A discount received is the reverse situation, where the buyer of goods or services is granted a discount by the seller. The examples just noted for a discount allowed also apply to a discount received. In case you wish to apply discount for a certain item, you should do a subtotal of the items prior to adding a discount item.

Example #1: Multiple Individual Line Items

By so doing, the sales discount is recognized in the same period as the invoices such that all aspects of the sale are recognized and harmonized at once. Sales discount refers to reduction in the amount due as a result of early payment, hence pertaining to cash discounts. In other words, the amount recorded as sales is always at net of any trade discount. Discounts on sales are recorded in a contra-revenue account named Sales Discounts.

Journal Entry

The discount expense and discount income are recorded on the debit side and credit side of the treble column cash book respectively. The seller grants some amount as a discount to the debtor for the realization of the outstanding sales within the term period of sales. With this setting on, the optional discount field displays in the subtotal of your sales forms. There are specific rules regarding accounting for discounts received; failure to comply may result in hefty fines.

Related AccountingTools Courses

Suppose the XYZ company recorded only one invoice in their accounting period. They are the expenses account which is reported in the income statement for the period that the allowance or discount occurs. Both cash or sales discount and allowance for sales discount is the same. A Cash or Sales discount is the reduction in the price of a product or service offered to a customer by the seller to pay the due amount within a specified time period. This is mainly an incentive to the purchasing party to settle the bill earlier than the prescribed date.

How to Set up a Sales Discount Account in QuickBooks Desktop?

The opposite of the revenue contra accounts Sales Discounts, Returns and Allowances are expense contra accounts Purchase Discounts, Returns and Allowances. By utilizing either the cash discount or net methods outlined above, you can keep track of all your sales activity accurately and ensure your books remain balanced throughout each fiscal year. Sinra Apparels can apply the same method across multiple products and multiple discounts. Let’s discuss the step by the step accounting treatment of sales discount.

The sales discount is dependent on the credit terms that the company offers its customers which allows them to pay a certain percentage lesser for goods and services. Sales discounts usually come with a fixed time or date for the customer to make the payment. When the customer does not pay for the goods or services within the stipulated discount time frame or date, the price reduction becomes forfeited. Before we proceed with the accounting entries, it is necessary to first distinguish between the two types of discounts being offered by Bike LTD. The 10% discount is a trade discount and should therefore not appear in Bike LTD’s accounting records.

Flaka Ismaili

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