Sales Discounts

Sales and Purchase Discounts Discounts are offered to people who buy on

account either from you – Sales Discounts Or from someone else – Purchase Discounts

The purpose is to encourage people to pay sooner

Think about it: an Accounts Receivable is your money in the hands of someone else – you want your money now!

Sales and Purchase Discount Rules

Rule1. Discounts only

occur when cash changes hands

2. Discounts always appear on the same side as cash

Reason1. This is the only

time you know for sure that someone has paid within the discount period

2. This is because you are accepting less cash for the discount

Sales and Purchase Discount Rules cont.

Rule3. The Discount only

affects Cash

4. Discounts are calculated on total amount owing

Reason3. Same as previous

4. Must pay total amount in order to receive discount

Sales and Purchase Discounts

There are 2 new accounts we will be using for recording Discounts

1. Purchase Discount (When you buy) This is a Contra–Expense Account

2. Sales Discount (When you sell)1. This is a Contra–Revenue Account

Therefore this has a Credit Balance

Therefore this has a Debit Balance

Sales and Purchase Discounts

One last thing about Discounts What are “Terms”? How do we ‘read’

them?

What does 2/10, n30 mean?

2% Discount

If paid within 10 Days

With 30 Days to pay without penalty

Discounts

An Example Jan. 10 – We bought a $1000 worth of

supplies on account. Terms are 2/10, n30. Write this information down!

 

Date Particulars P.R. Debit Credit 

1             1

2                 2

3                 3

Jan 10 Supplies 1000

Accounts Payable 1000

Bought supplies, Terms 2/10, n30.

Purchase Discounts Let’s now say that we want to take advantage of

the “Discount” and pay within the allotted time period (in this case it is 10 Days to receive a 2% Discount)

 

Date Particulars P.R. Debit Credit

 

1             1

2                 2

3                 3

Jan 18 Accounts Payable 1000

Cash 980

Purchase Discounts 20

Sales Discounts Let’s take the same question, only now we

sold instead of bought Jan. 10 – We sold $1000 worth of Supplies on

account. Terms are 2/10, n30.

 

Date Particulars P.R. Debit Credit 

1             1

2           2

3                 3

Jan 10 Accounts Receivable 1000

Sales Revenue 1000

Sold $1000 to J. Doe

Sales Discounts Again, it is now within the 10 Days and our

customer has chosen to take advantage of the Discount

 

Date Particulars P.R. Debit Credit 

1             1

2                 2

3                 3

Jan 18 Cash 980

Sales Discount 20

Accounts Receivable 1000

Purchase Discounts If the transaction was for cash (when you

bought supplies) and the discount was taken right away, it would look like this

 

Date Particulars P.R. Debit Credit

 

1             1

2                 2

3                 3

Jan 10 Supplies 1000

Cash 980

Purchase Discount 20

Sales Discounts If the transaction was for cash (when you

sold supplies) and the discount was taken right away, it would look like this

 

Date Particulars P.R. Debit Credit

 

1             1

2                 2

3                 3

Jan 10 Cash 980

Sales Discount 20

Sales Revenue 1000

The Merchandising Company- Sales and Purchase Discounts

New Account Type of Account

1. Merchandise Inventory Current Asset

2. Sales Revenue

3. Sales Discounts Contra-Revenue

4. Sales Returns & Allowances

Contra-Revenue

5. Purchases COGS (expense)

6. Purchase Discounts COGS (Contra-Expense)

7. Purchase Returns & Allowances

COGS (Contra-Expense)

8. Freight In COGS (expense)

9. Freight Out (Delivery Expense)

Operating Expense

Discounts & the Perpetual System

Your textbook will be assuming the periodic system

As you are aware by this point in the unit, the use of perpetual inventory systems is becoming more popular as technology advances

We MUST understand the difference between the two systems

The Perpetual System

There is no Purchase Discount account under perpetual (Remember, no COGS section on I/S)

Pay for Inventory within the discount period. $1000 2/10, n30

Transaction:Accounts Payable 1000

Cash 980Inventory 20

The Perpetual System

There is a Sales Discount account under the perpetual system

Therefore, sales discounts are treated the same under both systems

Sold Inventory for $1000 2/10, n30 and they pay within the discount period

Cash 980Sales Discount 20

Accounts Receivable 1000

Sales Discounts –Income Statement The total of Sales Returns and Allowances and Sales Discounts is subtracted from

sales Example:

For the month of June, Warrendon`s total sales were $62,000. Some customers returned merchandise (sales returns of $1,500), the amount of sales for the month must be decreased by $1,500. Sales Discounts of $500 were given to customers for early payment, sales must also be decreased by $500.

Sales Discounts –Income Statement Both Periodic & Perpetual

Warrendon Sports

Partial Income Statement

For the month ended June 20, 20-

Revenue

Sales $62, 000

Less: Sales Returns and Allowances $1,500

Sales Discounts $500 $2,000

Net Sales $60,000

Sales & Purchase Discounts Homework Page 311, 9B, 10B Page 312, 12B,C Page 316, 16B