What is a cash discount and how to record it?

A cash discount is a reduction of the cost of an item or service that a seller offers to a buyer to encourage cash payment for an immediate or outstanding invoice.

A seller offers cash discounts to obtain cash quickly to pay off debts and invest the money back into the business. A buyer grasps the opportunity of cash discounts so as to pay less money for goods and services.

When the seller offers a cash discount to a customer, it is called discount allowed and is recorded as an expense in the seller’s books. When the buyer receives a cash discount from a seller, it is called discount received and is recorded as income in the buyer’s books.

In the books of the seller, the account for a credit customer who is allowed a discount is called Account Receivable: Customer’s Name. In the books of the buyer, the account for a credit seller from which the buyer receives a discount is called Account Payable: Supplier’s Name.

How to record a cash discount?

The discount is usually a percentage of the cost of the item or the account of the customer or supplier.

Discount allowed example:

A 5% cash discount is given to ABC Ltd with balance $2,000.

Calculate 5% of $2,000 = $100

Balance is $2,000 less $100 = $1,900

In the Cash Book, on the debit side, record under:

Particulars: ABC Ltd

Discount allowed: $100

Cash: $1,900

Discount received example:

A 6% cash discount is received from DEF Suppliers with balance $3,000.

Calculate 6% of $3,000 = $180

Balance is $3,000 less $180 = $2,820

In the Cash Book, on the credit side, record under:

Particulars: DEF Suppliers

Discount received: $180

Cash: $2,820

What to do when goods are returned?

When goods are returned by the customer and a cash discount is given, deduct the returns inwards amount before calculating the discount.

When goods are returned to the supplier and a cash discount is received, deduct the returns outwards amount before calculating the discount.

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