Let me give you an example from the meat industry. We had 40,000 pounds of beef without a local customer, so we sold it to a company 1,000 miles away for the local price of say $1.50 per pound. Our accounting entry was to debit Accounts Receivable $60,000 and to credit Sales $60,000. We also knew that the beef would shrink approximately 800 pounds as it traveled in the refrigerated truck and that the customer would deduct $1,200 (800 pounds X $1.50) when the customer processed and paid our invoice. In order to more accurately report our Accounts Receivables, our Net Sales and our weekly profit, I immediately made an entry to debit Discount for Shrinkage (a contra account to Sales) and a credit to Provision for Discounts (a contra account to Accounts Receivable). By recording that entry, our balance sheet would report the true amount to be collected, $58,800 ($60,000 invoiced minus the anticipated deduction of $1,200). The income statement would report that Sales minus the discount were only $58,800.
The provision account allowed our Accounts Receivable to agree with our sales invoices, yet the balance sheet would report the net amount that we would realistically receive. It allowed us to "match" the discount to the week of the sale and not mismatch the discount to a later week when the customer remitted the reduced amount.
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