Sales Discounts

You can sometimes expedite your collections by offering your customers a discount for early payment. For example, if you offer 30­day terms, that means that your customers must pay your invoices in full within 30 days. However, you could offer terms such as 2/10 net 30, which means that your customers will get a 2 percent discount on their invoices if they pay you within 10 days; otherwise, the bill is due in full in 30 days.

Let's use the example from above. The customer's bill was $1,380, including retail taxes. The customer pays within 10 days and therefore takes the discount. You will know this because the customer sends you a check for $1,352.40 instead of one for $1,380. (Be aware, however, that frequently customers will try to stretch the discount, sending you a check after the 10 days is up.) You would have recorded the sale and account receivable in your books at the original invoice amount of $1,380. Remember that the original sales entry looked like this:

            DR     Accounts receivable           $1,380

            CR     Sales                                                    $1,200

            CR     Retail tax liability                                      180

But now you have a cash receipt of only $1,352.40. There are two ways to record this discount.

You know you need to take the full amount out of the receivable account because the customer doesn't owe you anymore. You could reverse the difference directly to the sales account (along with the associated retail sales tax). The entry would look like this: