Discounts are persistent in today’s corporate world. They are usually given in exchange for some consideration, ranging from prompt payment to market rivalry. The “Discount Allowed Account” is debited when a journal entry for a discount is posted.
The discount allowed is a business expense that is recorded on the debit side of the profit and loss account. Although trade discounts are not included in the primary financial statements, cash discounts and other discounts must be documented in the books of accounts.
When a transaction allows both a trade discount and a cash discount, the trade discount is granted first, followed by the cash discount.
Journal Entry for Discount Allowed
By debiting the cash account and the discount allowed account and crediting the accounts receivable, the company can make a journal entry for the discount allowed.
| ACCOUNT | DEBIT | CREDIT |
| Cash | $ | |
| Discount Allowed | $ | |
| Accounts Receivables | $ |
The discount allowed is a counter-account to the sales income, with its typical balance on the debit side. The amount of discount allowed will be deducted from both total assets on the balance sheet and net sales revenue on the income statement due to this journal entry.
It’s journalized, and the balances are transferred to the appropriate ledger accounts.
| Cash A/C | Debit | Real A/C | Dr. what comes in |
| Discount Allowed A/C | Debit | Nominal A/C | Dr. All expenses |
| To Debtor’s A/C | Credit | Personal A/C | Cr. The giver |
Allowing a discount raises a seller’s expense, but it also reduces the actual amount obtained from sales.
Benefits of Discount Allowed
Discounts might be an excellent approach to attract new clients, but they can also be a great way to keep your current customers happy. These are some of the benefits that come with offering discounts on your products and services:
- You can increase sales. You’re giving customers an incentive to buy from you instead of going elsewhere when you offer a discount. This may even lead them to make a purchase they wouldn’t have made otherwise.
- You can increase customer loyalty. Suppose you reward past customers by giving them discounts on future purchases. In that case, they’ll feel more appreciated and may feel more obligated to make future purchases and refer their close ones to do the same.
- You can generate positive word-of-mouth advertising for free! Customers who receive discounts will likely tell others about their experience and recommend your business because they want others to experience what they did too!
- It helps in reducing stock-outs.
- It attracts more customers by providing them with good discounts on their purchases.
- It helps increase sales volume and turnover compared to other methods of selling like fixed price and cost-plus markup pricing methods.
- It helps increase customer loyalty as customers get attracted to the products with good discounts offered by the seller.
Disadvantages of Discount Allowed
Discount allowed is a method of pricing where a price is reduced to reflect those customers are not paying for all of the cost of production.
This means that suppliers can offer a lower price and still make a profit. While there may be some advantages, there are also some disadvantages of discount allowed.
- Discounting can cause problems in the long term. When you give a discount, you effectively reduce your income by that amount. This means that you need to sell more products to make up for this loss in revenue. While this may be possible in the short term, it can cause problems over time as it requires that you sell more products. This can lead to overproduction and an increase in waste which will eventually lead to higher costs and ultimately lower profits for your company overall.
- Discounting also has adverse effects on customer relations and loyalty. A customer who pays the total price for their goods or services is likely to feel better about their purchase than one who gets them at a discounted rate because they feel like they got something extra or at least saved money in exchange for paying less than they would have actually paid.
- People will use this scheme to evade taxes.
- It will be difficult for tax officials to identify whether the discount is genuine.
- The companies will find it challenging to keep track of their expenses and revenues, leading to losses in accounts.
How is a Discount Allowed Recorded in Income Statement and Cash Flows?
A Discount Allowed is considered as a cost in the income statement and for calculating cash flow from operational operations.
The only difference between a Discount Allowed and any other expense is that it must be capitalized and amortized over its useful life.
For example, if a company sells equipment with a total selling price amount of $100,000 to another party at a discount of $10,000. The company sells it on credit. the following entry would be made:
Dr. Discounts allowances: $10,000
Cr. Account receivables: $90,000
Cr. Sales: $100,000
How to record the above transaction if it is cash sales?
Dr. Discounts allowances: $10,000
Cr. Cash/bank: $90,000
Cr. Sales: $100,000
Conclusion
Planning ahead the correct way is essential when it comes to preparation. Using discounts in accounting is a smart way to maximize your profits and save money on business expenses.
Having a budget and making your purchases using discounts is great; however, planning ahead will ensure you benefit from this feature.
Today’s consumers are no longer patient, and they will leave you if they don’t feel like you are giving them an experience tailored to their individual needs.
With that in mind, it would behoove any business to offer discounts for their customers as a customer retention strategy.
The fact is that every consumer wants a discount if it is provided. And by promoting customer happiness as one of your highest priorities, you can more than makeup for whatever amount of money you may be shaving off your margins by offering these discounts.