With the use of a contra-revenue account, the reader of the income statement will be able to differentiate between the original amount of sales revenue generated, the sales reduction, and the resulting net amount. When a sales discount is offered to few customers, or if few customers take the discount, then the amount of the discount actually taken is likely to be immaterial. In this case, the seller can simply record the sales discounts as they occur, with a credit to the accounts receivable account for the amount of the discount taken and a debit to the sales discount account. The sales discount account is a contra revenue account, which means that it reduces total revenues. Sales discounts are also known as cash discounts or early payment discounts.

• ABC Co sold its merchandise inventory to its customer on 01 November 20X1 for $2,000 with the credit term of 2/10, n/30.
• NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value.
• Let’s look at what is considered an expense in accounting in order to answer this.
• Let’s look at some examples of how sales discount is treated not as an expense account but as a contra revenue account.

Sales Allowances contra revenue account records the value of reductions in selling price granted to buyers who agreed to accept a defective product instead of returning it to the seller. Sales Discounts are a useful tool for companies to encourage customers to settle their credit purchases now rather than later. Sales discounts are not expenses so they do not have any effect on assets or liabilities, only revenue that will reduce net income.

Example of sales discount

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Sales discounts do not reduce any assets or liabilities, only revenue which reduces net income. Expenses and revenues are usually reported in a company’s income statements. Hence, a company’s net profit is the total revenue generated minus its expenses. That is, in order to calculate the profitability of a business, expenses are deducted from revenue.

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If the customer does not pay within the discount period and does not take the sales discount the business will receive the full invoice amount of 2,000 and the discount is ignored. If the customer pays within 10 days then a 2.5% sales discount amounting to 50 can be deducted from the sales invoice, and the customer will pay only 1,950 to settle the account. Trade discounts are not recorded as sales discounts and deduct directly at the time recording sales. 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. An example of a sales discount is for the buyer to take a 1% discount in exchange for paying within 10 days of the invoice date, rather than the normal 30 days (also noted on an invoice as “1% 10/ Net 30” terms). Another common sales discount is “2% 10/Net 30” terms, which allows a 2% discount for paying within 10 days of the invoice date, or paying in 30 days.

Debit or Credit?

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On 25 December 20X1, it sells construction materials to one of its customers for a total of $50,000. This means that if the customer makes payment within 10 days, the company will offer cash discounts of 2% with a credit period of 60 days. A discount allowed is when the seller of goods or services grants a payment discount to a buyer. It may also apply to discounted purchases of specific goods that the seller is trying to eliminate from stock, perhaps to make way for new models. It is a reduction of gross sales which correspondingly causes a decrease in the net sales figure. Expenses, on the other hand, also have a natural debit balance; as explained before this is not in any way the reason for sales discount being recorded as a debit.

The income statement of the XYZ Company will show the following figures. As you can see, full amounts of cash are received and the full amount of account receivables are discharged from the company account. The discount is applicable only if the customer making the payment and the payments are within the term and condition which is within the 10 days. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500. Most companies do not allow for cash discounts while some companies allow in order to encourage early settlement.

Sales Invoice Posted

The terms 2/10, n/30 mean the customer may take a two percent discount on the outstanding balance (original invoice amount less any returns and allowances) if payment occurs within ten days of the invoice date. If the customer chooses not to take the discount, the outstanding balance is due within thirty days. An abbreviation that sometimes appears in the credit terms section of an invoice is EOM, which stands for end of month.

What Are Selling Expenses?

The customer pays on the 5th day from the invoice date entitling him to the given discount of 2%. Another example is “2% 10/Net 30” terms, which means that a buyer will enjoy a 2% discount if he settles his balance within 10 days of the invoice date, or pays the full price in 30 days. When a business sells goods on credit to a customer the terms will stipulate the date on which the amount outstanding is to be paid. In addition the terms will often allow a sales discount to be taken if the invoice is settled at an earlier date.

Sales discount is debited as a contra revenue account and not as an expense. This means that the revenue that the business earned is reduced by a certain percentage. The disadvantage of this is to the seller as the seller bears the brunt of lower revenue due to sales discounts. https://accounting-services.net/are-sales-discounts-reported-as-an-expense/ Hence, offering a sales discount is like an extra cost for the seller which may seem like an expense that the seller expends. However, that is not the case, offering a sales discount reduces revenue and so is treated as a contra revenue rather than an expense.

They are the expenses account which is reported in the income statement for the period that the allowance or discount occurs. Jenny’s organics sold some skincare products on credit to Miss Mary on the 1st of May, 2022 and the total amount on the invoice was $30,000 which she has to pay on or before the 1st of June 2022. The invoice stated that if Miss Marry makes full payment before 15th May 2022, a 5% discount will be given to her.