Sales Discounts in Accounting: Are You Recording Them Correctly?

How to Use Sales Discounts in Accounting

There are several types of discounts to manage in accounting. Understanding how each one works, and how it affects your financial statements, helps ensure that your business records revenue, expenses, and customer payments accurately.

There are mainly three types of discounts to manage in accounting:

1. The discounts you offer customers on a sale.
2. Discounts you offer customers when they pay early or within specified payment terms.
3. Discounts you receive when paying your vendors early or within specified payment terms.

Payment terms establish the conditions under which customers or vendors must pay an invoice. They can include a discount for paying within a certain period, as well as a deadline for paying the full amount.

Sales Discounts

When you offer a customer a discount, say 10% for being a senior citizen, you record that discount as a reduction in sales revenue.

Businesses typically record sales discounts in a separate contra-revenue account. This account offsets income and carries a normal debit balance, which reduces the credit balance of your sales revenue account.

That may seem counterintuitive, but the purpose is to decrease reported revenue by the amount of discounts you offer. Otherwise, your income (sales) would be too high.

Is Sales Discount a Debit or Credit?

You record sales discounts as debits because they reduce revenue. Revenue accounts normally have credit balances, so a debit to the sales discounts account offsets some of the revenue you record in the sales account.

For example, suppose you sell a customer $1,000 worth of products and offer a 10% discount. The customer pays $900.

You record the $100 sales discount as follows:

Account                     | Debit ($) | Credit ($)
----------------------------|-----------|------------
Cash                        | 900       | 
Sales Discounts             | 100       | 
Sales Revenue               |           | 1,000

The $100 debit to Sales Discounts reduces gross sales to reflect the actual amount earned from the transaction.

What Type of Account Is Sales Discounts?

Sales Discounts is a contra-revenue account. Businesses generally classify it alongside revenue accounts on the income statement. However, it carries a normal debit balance rather than the credit balance that revenue accounts normally carry.

To calculate net sales, subtract sales discounts from gross sales.

For a closer look at how debits and credits work together, see our guide to double-entry bookkeeping.

A/R Discounts

Accounts receivable discounts are discounts you offer customers if they pay you within a certain amount of time. These discounts encourage customers to pay their invoices early.

For example, you may establish terms that say “1% 10, net 30.” These terms offer a 1% discount off the sale price if the buyer pays within ten days of the invoice date. Otherwise, they owe the entire amount within thirty days.

A/R discounts reduce the amount of revenue you ultimately collect. Like other sales discounts, you generally record them in a contra-revenue account.

Sales Discount Journal Entry Example

Suppose you issue a $5,000 invoice with payment terms of 1/10, net 30. The customer qualifies for the 1% discount by paying within ten days.

The discount is $50, so the customer pays $4,950.

First, record the initial invoice as follows:

Account                     | Debit ($) | Credit ($)
----------------------------|-----------|------------
Accounts Receivable         | 5,000     | 
Sales Revenue               |           | 5,000

When the customer pays within the discount period, record the payment as follows:

Account                     | Debit ($) | Credit ($)
----------------------------|-----------|------------
Cash                        | 4,950     | 
Sales Discounts             | 50        | 
Accounts Receivable         |           | 5,000

The $50 debit to Sales Discounts records the reduction in revenue, while the credit to Accounts Receivable clears the original customer balance.

If the customer pays after the discount period but within the thirty-day payment window, the business receives the full $5,000. In this case, you do not record a sales discount.

For another example, see OpenStax’s explanation of merchandise sales and sales discount journal entries.

A/P Discounts

Accounts payable discounts are discounts your vendors may offer you if you pay them within a certain amount of time. These discounts encourage you to pay your bills early.

For example, your vendor may offer you terms of “1% 10, net 30.” These terms offer you a 1% discount if you pay your bill within ten days of your purchase. Otherwise, you must pay the full amount within thirty days.

A/P discounts reduce the amount your business pays for purchases. Depending on the type of purchase and your inventory accounting method, the discount generally reduces the cost of inventory, purchases, or cost of goods sold.

For example, if you purchase $1,000 worth of materials and receive a 1% discount for paying within ten days, you save $10 and pay only $990.

Record the discount in a way that properly reflects the reduced purchase cost in your financial statements.

Tips on Credits and Debits

• Establish clear payment terms for both customers and vendors to specify payment deadlines and applicable discounts.
• Vendors use several common payment terms. One example is 1/10, net 30. This term offers a 1% discount if you pay within ten days from the invoice date. Otherwise, you owe the full amount within thirty days.

Understanding how these discounts affect your financial statements is important when organizing your chart of accounts and reviewing business performance.

Under ASC 606 revenue recognition guidance, discounts and other price concessions may also affect the transaction price used to recognize revenue. Businesses should account for applicable discounts consistently with the nature and terms of their customer agreements.