How to use Sales Discounts in Accounting
This article offers an overview of discounts and terms (financial terms of the sale). We don’t explain the details of how to setup discounts or terms. There are links at the bottom of this article for that.
Terms and Discounts
There are mainly three types of discounts to manage in accounting.
The discounts you offer customers on a sale.
Discounts you offer customers when they pay early or perhaps within terms, these are called payment terms.
Discounts you receive when paying your vendors early or within terms, these are also called payment terms.
Payment Terms are setup for either customers or vendors. You can setup as many terms as you may need. When you setup terms, you use the same form for both vendor terms and customer terms.
When you offer a customer a discount, say 10% for being a senior citizen, you create a discount item. This is a regular item but the item type is a discount. The account (from the Chart of Accounts) is usually the type “Income”. That may seem counter intuitive but your discounts should decrease revenue (AKA: Sales). Otherwise discounts will make your income (sales) too high.
Accounts receivable discounts are those you may offer a customer if they pay you within a certain amount of time. This is done to hopefully get your customers to pay you early.
For example you may setup terms that say “1% 10, net 30”. These terms may offer a 1% discount off the sale price if the buyer pays within ten days of the invoice. Otherwise they will owe the entire amount after thirty days.
A\R discounts cost you money and this expense must be tracked. When you setup customer terms, you will be required to pick an account from your COA. We recommend that A\R discounts be treated as a Cost of Goods Sold so you will need to pick an account type of “Cost of Goods Sold”.
Accounts payable discounts are those your vendors may offer you if you pay them within a certain amount of time. This is done to hopefully get you to pay them 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 will be required to pay your bill after thirty days.
A\P discounts make you money and this income must be tracked. When you setup vendor terms, you will be required to pick an account from your COA. We recommend that A\P discounts be treated as income so you will need to pick an account type of “Income”.
Tips on Credits and Debits
Use the Terms feature to setup terms for both customers and vendors.
There are a number of popular terms used by vendors. In fact there is no limit to what vendors may offer you or what you may offer your customers. Another popular term is 1% 10 net 30th. This term offers you a 1% discount if you pay within ten days from the date you made the purchase. Otherwise you owe the entire amount on the thirtieth.
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