What is a sales discount?

Sales discount is a reduction in the amount of sale price which is often used by companies as a marketing ploy, either to increase sales or to encourage early payments from customers.

There can be several arrangements and ways in which sales discount can be offered, some of which are given below:

  • Early payment discount or cash discount (encouraging the customers to pay early)
  • Bulk discount (encouraging the customers to buy more)
  • Loyalty discount (encouraging the customers to become regular or repeat customers)

There may be a set policy for discounts or there may be a practice of negotiable discounts. In either case, accounting of discounts will remain the same.

Accounting of sales discounts

As the discounts reduce the sales price and sales revenue, therefore, discounts availed by the customers are recorded in a contra revenue account. As the normal balance of revenue account is “credit”, so the normal balance of sales discount account is “debit“. Net sales revenue is reported in the income statement after deducting the debit balance of sales discount account from the credit balance of sales revenue account (gross sales).

Let’s take a look at the following example for further clarification.

Example – What is a sales discount?

An electronics company has offered following two discount offers for its customers:

  • A cash discount of 10% on credit sales if the customer pays the amount within 15 days of the purchase.
  • A bulk discount of 5% on sales of more than $15,000.

Scenario I: A customer purchases two laptops for $2,000 on credit. To avail the cash discount, the customer pays for the laptops after 12 days of purchase, thus paying only $1,800.

Scenario II: A customer purchases two laptops for $2,000 on credit. The customer is unable to arrange the funds and pays for the laptops after 30 days of the purchase.

Scenario III: A large corporate customer purchases twenty laptops for $20,000. Based on the value of order, bulk discount of $1,000 was offered to the customer.

For all of the above scenarios, show the journal entries that will be required to record the above transactions.

Entries for sales discount

Scenario I

Following entry will be made at the time of sale.

Dr. Accounts receivable — $2,000
Cr. Sales revenue ————– $2,000

Following entry will be made at the time of payment from customer.

Dr. Cash or bank —– $1,800
Dr. Sales discount —- $200
Cr. Accounts receivable — $2,000

Scenario II

Following entry will be made at the time of sale.

Dr. Accounts receivable — $2,000
Cr. Sales revenue ————– $2,000

As the time period for cash discount has lapsed, therefore no discount is availed by the customer. Following entry will be made at the time of payment from customer.

Dr. Cash or bank —– $2,000
Cr. Accounts receivable — $2,000

Scenario III

Following entry will be made at the time of sale.

Dr. Accounts receivable — $19,000
Dr. Sales discount ———– $1,000
Cr. Sales revenue —————– $20,000

* Bulk discount is availed at the time of sale and is not dependent on payment within specified period.