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 Rule 1.Discounts only occur when cash changes hands 2.Discounts always appear on the same side as cash Reason 1.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. Rule 3. The Discount only affects Cash 4. Discounts are calculated on total amount owing Reason 3. 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! DateParticulars P.R. DebitCredit 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) DateParticulars P.R. DebitCredit 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. DateParticulars P.R. DebitCredit 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 DateParticulars P.R. DebitCredit 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 DateParticulars P.R. DebitCredit 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 DateParticulars P.R. DebitCredit Jan 10 Cash 980 Sales Discount 20 Sales Revenue 1000

The Merchandising Company- Sales and Purchase Discounts New AccountType of Account 1. Merchandise InventoryCurrent Asset 2. SalesRevenue 3. Sales DiscountsContra-Revenue 4. Sales Returns & Allowances Contra-Revenue 5. PurchasesCOGS (expense) 6. Purchase DiscountsCOGS (Contra-Expense) 7. Purchase Returns & Allowances COGS (Contra-Expense) 8. Freight InCOGS (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 Payable1000 Cash980 Inventory20

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 980 Sales 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