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Sales Discounts

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They say that cash flow is king when running a business.

Having cash in one's hand eliminates the risk of non-payment or late payment.

Having cash in one's hand also allows one to pay off his own debts sooner and to enter into negotiations with a greater degree of bargaining strength.

Because cash is so important, many businesses will offer discounts to customers who pay early.

For instance, a company may bill a customer $500, but then promise to knock off 3% if payment is received within 5 days.

This is all well and good, but how should this practice be noted in a vendor's financials?

There are two accepted methods:

  • Gross Method - Record the sale as if no discount will be taken
  • Net Method - Record the sale as if a discount will be taken

The vendor will deal with a customer payment differently, depending upon which method has been chosen and whether the customer pays his bill early.

Question Sierra inc., the upstart chair manufacturer, made a $188.00 sale under the following terms: 4/10, net 30 (4% discount if paid within 10 days, all payments due within 30 days).
Assuming that the customer does not pay early, what are the journal entries required for the sale and payment under the net method?
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