What is Discount Allowed and Discount Received?

What is Discount Allowed?

Discount allowed can be defined as a reduction in price of goods or services, which is allowed by a seller to a buyer at the expense of the seller. It is the discount given to customers on prompt payment of their accounts. It must be treated as an expense and hence be debited to discount allowed and credited to the personal accounts of the customer.

In business, there are two types of discounts allowed by the seller to the buyer. They're; Trade discount and Cash discount.

Trade discount is the allowance off the invoiced or catalogue price of an item given by the manufacturer to a customer. It is given at the period of sales, such as bulk purchase.

A cash discount on the other hand is given to a customer as a reward for prompt payment of accounts. It appears as an expense in the income statement. At first, the sales are recorded in full amount. However, the amount of discount is deducted from the account receivables.


Journal Entry for Discount Allowed

In accounting, discount allowed is accounted as an expense of the seller. Hence, it is debited as you prepare accounting entries in the books.

Journal entry performed

What is Discount Allowed and Discount Received?

Example

Mr. Timothy sells a television at $50,000. He gives a 10% trade discount if the customer purchases 2 televisions and a further 5% discount on the amount of total sales if the customer makes a cash payment in advance.

In this case, the seller gives the customer two types of discounts. Firstly, a 10% trade discount to increase the sales and a 5% cash discount as an inducement to make a quick payment.

Trade discount is not recorded in the books while sales are recorded as total trade discount offered.

What is Discount Allowed and Discount Received?


What is Discount Received?

Discount received can be defined as the reduction in price of goods and services to the buyer from the seller or the manufacturer. It is treated as an income for the buyer and hence it is credited to discount received and debited to the personal account of the supplier.

Both discounts allowed and received are classified under nominal accounts.


There are two types of discounts received by the buyer; trade discount and cash discount.

Generally, trade discount is given on bulk purchases at the period when sales happened. Hence, the Purchase amount is recorded in the books after deducting trade discount.

A cash discount is received as an inducement for prompt payment. It appears as an income in the Profit and loss account or income statement. At first, the amount of purchases are shown in full. Then, the amount of discount is deducted from the payables.

When the buyer is preparing his account, he records discounts received as an income in his books. Hence, it is credited.

Journal Entry for Discount Received

What is Discount Allowed and Discount Received?

Example

Mr. Timothy sells a television at $50,000. He gives a 10% trade discount to the customer if he purchases 2 televisions, an extra 5% discount is given on the total sales value of the product if the customer makes cash payment in advance.

In this case, the seller is offering the customer two types of discounts. Firstly, a 10% trade discount to increase the sales, secondly, a 5% cash discount as an inducement to make a quick payment.


Trade discount is not accounted for in the books, and Purchases are recorded as total trade discount received.

What is Discount Allowed and Discount Received?


Accounting Entries For Discount Allowed and Discount Received in Cash Book

A cash book is the book for recording detailed information of all money received and paid. Transactions like cash sales, cash purchases, etc are recorded in the cash book. Credit transactions are not accounted in the cash book. 

The cash book has two sides i.e., the Debit side (Dr) which is on the left hand side and the Credit side (Cr) which is on the right hand side. Cash and bank payments received from customers are recorded on the debit side, while cash and bank payments to suppliers or expenses are recorded on the credit side.

The cash discounts allowed by the seller is recorded on the debit side of the cash book while the discount received by seller from manufacturers are recorded on the credit side of the cash book


The format of the cash book is shown below;

What is Discount Allowed and Discount Received?


Treatments Of Discount allowed and Discount Received in Trial Balance

Trial Balance shows the credit and debit balances of all the accounts which are extracted from the ledger. In accounting, the debit and credit side of the trial balance must be equal. If they aren't, then there is a mistake somewhere along the line.

The rules of trial balance states that all income must be credited while all expenditures must be debited. See other rules of trial balance

Therefore, for the buyer, discount received is an income. Hence, the total in the discount received account will be recorded on the credit side of the trial balance.

The same goes to discount allowed. It is an expenses for the seller. Hence it is recorded on the debit side of the trial balance.


Difference Between Discount Allowed and Discount Received
  1. Discount allowed is given to the buyer by the seller while discount received is received from the seller by the buyer.
  2. Discount allowed is the expense of the seller while the other is an income of the buyer.
  3. Discount allowed is recorded on the debit side in the books of the seller while the other is recorded in the credit side in the buyer's books.
Advantages of Discounts
  1. Increased Sales – It helps increase sales and attract new customers. As buyers are stimulated when paying lesser money for a product.
  2. It Saves Money – When given discounts, the buyer saves money since he will pay lesser for the same quantity of goods and services.
  3. Early Payments – Cash discounts helps the seller get early payments for the goods sold and services rendered.
  4. Customer Loyalty – Customer will likely come back to purchase goods from where he can get discounts.

Conclusion

Discounts received and allowed are two sides of one coin. In any transaction with discounts, one party allows it, while the other is receiving it.

On the side of the buyer, the discounts received is an income of the buyer, while discounts allowed is the expense of the seller. However, on the side of the seller, it is an income for the seller and the discount allowed is an expense for the manufacturer/suppliers.