Should a cash discount be recorded as a reduction to an expense?

Yes, a cash discount should be a reduction to an expense. After all, accountants define cost as the cash amount (or cash equivalent amount) at the time of the transaction.

To illustrate, let's assume that your company receives marketing consulting services and is billed $10,000 with terms of 1/10, net 30. If the bill is paid within 10 days, the cost is $9,900 ($10,000 minus the 1% discount of $100). This means that Cash should be credited for $9,900 and that the account Marketing Consulting Expenses should be debited $9,900. The cost of the marketing services was the cash price of $9,900.

It would be wrong to record $10,000 as a debit to Marketing Consulting Expenses and to record a credit of $100 in the account Cash Discounts. The reason is that the Cash Discounts is usually intended to be a contra account for Purchases, which is used by companies that purchase goods for resale.

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