Principles of Accounting: Discount Allowed

• As already pointed out elsewhere cash and cash equivalent are the life blood of business
• It is also common cause that most businesses do sell goods on credit
• To encourage prompt payment businesses offer discounts to their customers
• When a business offers a payment discount to its customers this is known as discount allowed
• This is because the business allows the customer to pay a lesser amount that is on the books
• The entries required to record a transaction involving discount allowed are different from those where there is no discount
• Generally there are two approaches to recording discount allowed:
  1. Using the Discount Allowed Account in the General Ledger for every transaction involving discount
  2. Using a three column Cash Book to record the individual discount entries and transfer the total Discount allowed at the end of each period to the Debit side of the Discount Allowed Account
• In reality there are many variations to the methods above for example some businesses still use a two column Cash Book with  Bank and Discount columns and record all cash transactions in the Petty Cash Book
• When you encounter the question  an exercise or examination question you should look at what is required before answering
• At the end of each trading period the Discount Allowed Account is credited with the total Discount Allowed
• The Profit and Loss Account ( not to be confused with the Trading Account here) is debited with the total amount of discount allowed for the period
• Since the column method of presenting the Income Statement is used in exercises and examinations a debiting of the Profit and Loss Account is shown as an expense instead
• As a result total Discount Allowed for the period is deducted as part of expenses such as wages and salaries
• At this point it is important to clarify the nonsense that is often pushed by misinformed teachers and educators by stating this fact: The horizontal method is the most used method of recording transactions in the real world
• The columnar method is preferred when presenting the Profit and Loss Account (Income Statement)
• You should master the columnar method so as to not confuse yourself

Entries to be made in the books to record Discount Allowed

1. Using a two column Cash Book:
   1. Debit the Debtor’s Account in the Sales Ledger and Credit the Sales Account in the General Ledger to record the original credit sale
   2. When the payment is made:
      1. First Debit the Cash/Bank Account in the Cash Book and Credit the Debtor’s Account in the General Ledger
      2. Debit the Discount Allowed Account in the General Ledger and Credit the Debtor’s Account with the Discount Amount to record the Discount
   3. The Debtor’s Account refers to the named debtor’s account and not a Debtor’s Account e.g. if goods were sold to J Smith,  entries are made to J Smith’s Account see the simple example here for clarification
2. Using a three column Cash Book
   1. Debit the Debtor’s Account in the Sales Ledger and Credit the Sales Account in the General Ledger to record the original credit sale
   2. When the payment is made:
      1. First Debit the Cash/Bank Account in the Cash Book and enter the Discount Allowed amount in the corresponding column on the Debit side and Credit the Debtor’s Account in the General Ledger
      2. At the end of the month transfer the total Discount Allowed for the period to the Debit side of the Discount Allowed Account
3. Despite which method is used to record Discount Allowed at the end of the period the following entries are made:
4. Credit the Discount Allowed Account with the total amount of discount
5. Debit the Profit and Loss Account with the total amount of Discount Allowed

• To view a simple example of Discount Allowed Entries click here

To access more topics go to the Principles of Accounts Notes.