Discount Allowed Accounting

Discount Allowed Accounting

In this article we would discuss the discount allowed accounting.This Discount is offered to customer on early payment. The discount allowed is treated as expense for the business. Discount is debit and account receivable is credited. 

Discount allowed will reduce the individual customer and total receivable account. It is important to note that discount allowed shall not affect sales. Accounting treatment of discount allowed can be summarized as follow

a)    Discount allowed is an expense.

b)   Discount allowed will reduce the debtor account. (To whom discount given).

c)    Discount allowed have no impact on sales.

d)   Discount allowed will be debited and Debtor account is credited.

Discount Allowed Accounting Example

Credit Sales= 100,000

Discount allowed= 5%

What would be journal entry for discount allowed?

Solution

General Journal

At the time of sales , debtor will be debited being increase in asset and sales will be credited being increase in income. The recording of this entry is shown below

Date	Particulars	Dr	Cr
	Faheem Khan A/c	100,000
	Sales		100,000

At the time of discount allowed on early payment, discount allowed will be debited being increase in expenses and debtor is credited being decrease in asset.This entry is shown as under

Date	Particulars	Dr	Cr
	Discount Allowed A/c	5,000
	Faheem Khan A/c		5,000

General Ledger

The above two journal entry are posted below in the T accounts. The below sales account clearly shows that discount allowed has no effect on sales  (not charged to sales), rather it reduces the receivables.

                                             Sales Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	P&L	100,000		Faheem Khan	100,000
		100,000			100,000

                                               Discount Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Faheem	5,000		Profit & loss	5,000
		5,000			5,000

                                                     Faheem Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Sales	100,000		Discount	5,000
				Balance	95,000
		100,000			100,000

Trial Balance

The following trial balance can be extracted from the above T Accounts. The trial balance shows the discount as debit balance being expense.

Account	Dr.	Cr.
Sales		100,000
Discount Allowed	5,000
Debtor	95,000
	100,000	100,000