Definition of 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. Sales discounts are also known as cash discounts and early payment discounts.
Sales discounts are recorded in a contra revenue account such as Sales Discounts. Hence, its debit balance will be one of the deductions from sales (gross sales) in order to report the amount of net sales.
Example of Sales Discounts
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 the $891 within 10 days, the seller will record the money received as follows:
- Debit Cash for $891
- Debit Sales Discounts for $9
- Credit Accounts Receivable for $900