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Accounts Payable (2)

For the seller, the cash discount is called a sales discount. If the discount is taken on a purchase, it may be called a purchase discount.

If a company takes a discount, it doesn’t have to send quite as much money as it has recorded as the amount of the payable.

The invoice indicates that there is a 2 percent discount available for paying within 10 days. If we pay within 10 days, then we have to send only $980 [$1,000 – ($1,000 x 0.2)].

As you can see, we will need to credit some account for $20 in order to balance the account. What account should get the $20? We have a choice of which account to credit. If we took the discount on the purchase of an asset or the incurrence of an expense, we can reduce the asset or expense by using the credit to offset the original debit. The other option is to record the discount as revenue. If we want to record it as revenue, we should set up a discrete revenue account and call it something like Cash discounts, to distinguish it from the main revenue account. We also do not want to call the account Purchase discounts,’’ as that title will be used in Chapter 17. Commonly, the credit will simply go to the original account debited. In this case, that account would be office supplies.

Taken From : Accounting Demystified

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