What are sales discounts?

Definition

Sales discounts is the account a shop uses when a customer pays less than the billed ticket because of a price cut or early-pay terms. On the books, this is a contra-revenue account, a subtraction from billed revenue on the Income Statement, not an expense.

An office supply shop that offered 2/10, n/30 on a $500 invoice records a $10 sales discount if the customer pays in ten days. The billed ticket stays $500; this line holds the $10 cut.

Cash-basis books may only show the $490 that arrived. Accrual books keep the $500 receivable until payment, then raise this contra for the $10 the shop did not collect.

This line cuts billed sales. It is not rent, wages, or another cost sitting below the top of the P&L.

Where it shows up

Balance Sheet: Related to collecting a receivable for less than the billed amount.

P&L: Located as a reduction of billed sales.

Cash flow: Decreases in receivables, reported cash from operating activities increases.

See also: Early Payment Discount · Net Revenue · Revenue

When you look at your Income Statement, this account sits under billed sales and brings the total down to net revenue. It does not appear with operating expenses.

When the balance is high, more customers took the cut, or the shop offered deeper terms. When it is low, most tickets were collected at the billed amount.

The Balance Sheet related piece is a receivable collected for less than the invoice. Cash comes in short of the billed ticket, and the receivable still has to fall to zero.

The profit and loss statement is the home for this contra. After the close, it resets with the other revenue accounts.

On the Statement of Cash Flows, the cash that did arrive is an operating inflow. The $10 that never arrived is this contra, not a second cash event.

How it works

The contra gets onto the books when the customer actually takes the terms. Offering 2/10 on the invoice does not, by itself, post this account.

When the $490 check arrives, the shop debits cash for $490, debits this account for $10, and credits accounts receivable for $500. The billed sales credit stays; this line holds the cut.

That debit is a reduction of billed sales. It is not an expense, and it is not a bank fee.

Payment terms are the agreement that made the cut available. Early-pay language such as 2/10, net 30 is the usual small-business version.

A trade discount taken off the list price before the invoice is written is often not this account. That cut never reached the billed ticket, so there is nothing left to contra.

Stay with the cut that was taken after the invoice. The billed start is still gross revenue; this line is what net revenue does not keep.

Days sales outstanding can look better when customers take the early-pay deal. The cost of that faster collection is this contra, not a separate fee.

A credit memo can also document a one-off price cut after the invoice. The P&L home is still this contra, or sales returns and allowances if the shop books concessions there.

After the close, this account returns to zero. Next month's taken terms start the contra again.

Keep the invoices and remittance advices that show the discount taken. Anyone tying cash to the open invoice should be able to see why $500 became $490.

Example

An office supply shop invoices a school $500 of paper on Monday, terms 2/10, n/30. The school pays $490 on Thursday.

The discount taken is recorded:

Debit: Sales discounts $10

Credit: Accounts receivable $10

Billed sales for the week still include the original $500. This contra brings net revenue down by $10, and the remaining $490 receivable is cleared when the check is deposited.

If the school had waited past ten days and paid $500, this account would stay at zero. The terms were offered; they were not taken.

The Income Statement shows $490 of leftover billed sales from that ticket. Cash rose by $490, and the receivable is gone.

Common mix-ups

Sales discounts is not an expense. Expenses sit below the top of the P&L; this account reduces billed sales.

This line is not sales returns and allowances. Returns and allowances are goods sent back or a concession on the ticket; this line is the price cut or early-pay terms taken.

This line is not the payment terms themselves. Terms are the offer; this account records only the cut the customer actually took.

Related terms

• Early Payment Discount: A price reduction offered for paying an invoice ahead of the due date.
• Net Revenue: Gross sales after returns, discounts, and allowances are subtracted.
• Gross Revenue: Total billed sales before returns, discounts, and allowances.
• Payment Terms: The agreed deadline and conditions for paying an invoice.
• Net 30: Payment terms requiring the full invoice to be paid within thirty days.
• Invoice: The document that bills a customer and creates a receivable.
• Revenue: The total value of goods and services the business earned in a period.
• Days Sales Outstanding: The average number of days it takes to collect an invoice.
• Credit Memo: A document that reduces what a customer owes.