With the economy on the rise again, it will be up to businesses to bring in both new customers and old ones. While there are a number of tools and methods to do so, one of the most popular tends to be offering products at a discounted price so they’ll be enticed to buy something they’d otherwise be reluctant to. So we at From Red To Black LLC are going to teach you how to record Sales Discounts in your bookkeeping.
We will start with the explanation first of what a Sales Discount is. When you discount something, you are offering a product or service at a reduced cost to the client or customer. However, the costs involved with said products and services haven’t changed and the amount discounted needs to be recorded somewhere. That’s where the Sales Discount account comes in.
First, take note of the following example where we record the sale of some goods without a discount:
Jan 1st: Cash $256
Sales Revenue $256
Cost of Goods Sold $178
Inventory $178
In the example above, we have sold some goods for a total of $256, paid upfront in Cash. The Inventory that we lost was the same amount as the total Cost of Goods Sold. This is how merchandise sales are usually recorded, but let’s see the difference when a discount comes into play:
Jan 1st: Cash $200
Sales Discount $56
Sales Revenue $256
Cost of Goods Sold $178
Inventory $178
We see that a new account was used to record for the difference between the Cash we received and the Sales Revenue. Sales Discount is a contra-revenue account, as it is part of Sales Revenue but serves to reduce the Gross Revenue so you can perceive the Net Revenue earned when it is time to produce the Income Statement. That way we have recorded everything and can use the information for future financial planning, making it a small addition but an important one for business owners.
It should be noted that most discounts are used for the sake of either moving goods or marketing, so the amount lost in revenue to the discount will typically be insignificant compared to if the goods have to be discarded entirely due to obsolescence or being damaged or perishing. Likewise, if giving discounts is something that happens commonly, the business should have an Allowance account set aside for the sake of offsetting them with an estimated amount based on previous discounts—which is another reason for the existence of the Sales Discount account.
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