What are sales discounts?

Sales discounts (if offered by sellers) reduce the amounts owed to the sellers of products, when the buyers pay within the stated discount periods.

To illustrate a sales discount let's assume that a manufacturer sells $900 of products and its credit terms are 1/10, n/30. This means that the buyer can satisfy the $900 obligation if it pays $891 ($900 minus $9 of sales discount) within 10 days. The alternative is for the buyer to pay $900 within 30 days. If the buyer pays within 10 days, the seller will record a debit to Cash for $891, a debit to Sales Discounts for $9, and a credit to Accounts Receivable for $900.

The account Sales Discounts is referred to as a contra revenue account. Hence, its debit balance will be one of the deductions from sales (gross sales) in order to report the amount of net sales.

Sales discounts are also known as cash discounts and early payment discounts.

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