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written by | September 14, 2022

Discount Allowed and Discount Received (Journal Entries with Examples)

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What is the difference between a discount allowed and a discount received? This might seem like a simple question to you, but it can get confusing. 

There are many discounts that are allowed and received by individuals daily. For example, a student may receive a discount on tuition at a college or university. Also, many employers offer their employees discounts on products or services. For example, an employee of a clothing store may receive a discount on clothing. Additionally, members of certain organisations may receive discounts on membership dues or event tickets. There are many examples of discounts allowed and received by individuals every day.

 In this blog post, we'll learn about the difference between a discount allowed and a discount received with examples to help clear things up. Let's get started.

Did you know? When a seller provides a discount to the buyer of goods or services, this particular discount is known as the discount received.

What is Discount Allowed?

A reduction in the price of products or services that is granted by a seller to a buyer at the expense of the seller is known as a discount authorised. It is the discount offered to consumers who pay their accounts on time. It must be handled like an expense, so the discount is debited and the customer's personal accounts are credited. 

For example, Mr. Singh charges ₹50,000 for a television. When a customer buys two televisions, he offers a 10% trade discount and an additional 5% reduction on the total sales price if the buyer pays in cash up front.

The merchant offers the buyer two different types of discounts in this instance. First, a 10% trade discount to boost sales and a 5% cash discount to encourage prompt payment are offered.

Also Read: Cost Accounting vs Management Accounting

How to Calculate the Discount Allowed?

In accounting, the discount allowed is the reduction in the selling price of goods or services that are given by the seller to the buyer. This discount can be in the form of cash, vouchers, or credit. The purpose of the discount allowed is to promote early payment by the buyer, which helps to improve the cash flow of the business. There are several ways to calculate the discount allowed. But the most common method is to take the original selling price and multiply it by the discount rate.

Discount Allowed = Original Selling Price X Discount Rate

For example, if a product is originally priced at 100 and the discount rate is 10%, then the final selling price would be 90. The amount of discount allowed can also be expressed as a percentage of the original selling price. In this case, the 10% discount would result in a 10 reduction from the original price, which would be equal to a 10% discount. When calculating discounts, it is important to consider both the original selling price and the final selling price in order to determine the true savings.

There are a few discount calculation methods that lawyers use. To calculate the discount allowed, first determine the type of transaction and then use the appropriate method. The two most common types of transactions are open accounts and promissory notes.

  • For open accounts, the discount is calculated by taking an outstanding balance and multiplying it by the number of days the payment is late, divided by 360. 
  • For promissory notes, the discount is calculated by taking the face value of the note and multiplying it by the number of days from the date of purchase to the date of maturity, divided by 360. 

There are other methods used for calculating discounts on different types of transactions, but these are the two most common. To calculate the discount allowed, simply use the appropriate method for the type of transaction involved.

What is the Discount Received?

You want to receive a decent bargain whenever you buy products, components, or accessories from providers. For your loyalty or to encourage you to make larger purchases, suppliers may occasionally provide discounts. Here, we're referring to discounts that were obtained.

Consider that you are a clothing retailer and that you choose to make upfront purchases. The vendor might give you a discount in exchange. To further lower your costs, he might possibly give discounts on older items that he's attempting to get rid of from his inventory

Discounts can also be used to encourage customers to make timely payments. In some cases, companies may offer discounts for early payments to receive a greater level of interest income. Discount received is recorded as a reduction to Accounts Receivable on a company's balance sheet.

For example, when a seller permits a discount, the drop in revenues is noted and is often credited to a contra revenue account. For instance, the seller permits a ₹50 reduction from the ₹1,000 billed price for services it has rendered to a customer. A debit of ₹950 is made to the cash account, a credit of ₹1,000 is made to the accounts receivable account, and a debit of ₹50 is made to the sales discount contra revenue account to reflect the cash received from the customer. As a result, the transaction's overall result is a decrease in gross sales.

A reduction in the expense (or asset) related to the transaction, or in a separate account that tracks discounts, is recorded when the buyer receives a discount. The buyer debits the accounts payable account for ₹1,000, credits the cash account for ₹950, and debits the early payment discounts account for ₹50 to continue with the previous scenario from his point of view. If the generated data is not used, it is frequently simpler to ignore a discount that was given.

Also Read: Differences between Financial Accounting and Management Accounting

How to Calculate the Discount Received?

There are a few different ways to calculate the discount received on an item. The first method is to take the original price of the item and multiply it by the discount percentage. This will give you the total amount of the discount. For example, if an item is originally priced at 100 and is discounted by 10%, the total discount would be 10.

Original Price 

100

Discount Percentage 

10%

Total Discount

10
 

The second method is to take the sale price of the item and subtract it from the original price. This will give you the amount of money that was saved with the discount. For example, if an item that was originally priced at 100 is discounted by 10% and sold for 90, the total amount saved would be 10

Finally, you can take the sale price of the item and divide it by the original price. This will give you the discount percentage. Using our previous example, if an item that was originally priced at 100 is discounted by 10% and sold for 90, the discount percentage would be 10%. No matter which method you use, calculating discounts can help you save money on your next purchase.

The Difference Between a Discount Allowed and a Discount Received

When businesses provide goods or services to other businesses, they often offer discounts as an incentive for early payment. These discounts can take the form of a discount allowed or a discount received. A discount allowed is a reduction in the selling price of an item, while a discount received is a reduction in the purchase price of an item. The two terms are often used interchangeably, but there are some important differences between them.

Discounts allowed are typically used to encourage timely payment and strengthen business relationships. By offering a discount for early payment, businesses can improve their cash flow and free up working capital. Discounts allowed can also be used to reward loyal customers or to thank them for ordering in bulk. In contrast, discounts received are typically used to negotiate better prices from suppliers. By asking for a discount, businesses can reduce their costs and improve their bottom line.

While there are some more important differences between discounts allowed and discounts received, the two terms are often used interchangeably. When evaluating discounts, businesses should consider their impact on cash flow, profits, and relationships with customers and suppliers.

Also Read: Matching Concept in Accounting: Benefits and Challenges

Discount Allowed 

Discount Received

  • A discount allowed is a reduction in the selling price of goods or services that is offered by the seller to the buyer. 
  • Discount received is a reduction in the purchase price of goods or services that is offered by the supplier to the buyer. 
  • A discount allowed may be offered for various reasons, such as to generate sales or clear inventory.
  • Discount received is typically offered as a result of negotiations between the buyer and supplier.
  • A discount allowed is recorded as a reduction in revenue on the seller's income statement
  • Discount received is recorded as a reduction in the cost of goods sold on the buyer's income statement.
  • Discounts allowed are often stated as a percentage of the original selling price.
  • Discounts received are often stated as a percentage of the original purchase price.
  • Discounts allowed may be offered at any time during the sales process.
  • Discounts received are typically offered at the time of purchase. 
     
  • When discounts are taken, the difference between a discount allowed and a discount received can have an impact on gross profit margin. If a seller offers a 10% discount off of the original selling price and the buyer takes advantage of that offer, then the gross profit margin will be lower than if no discount was offered (or if the buyer had negotiated a 10% discount on their purchase).

The Importance of Discounts in Business Transactions

Discounts is a popular marketing tool used by businesses of all sizes to entice customers to make a purchase. There are many different types of discounts, but all have the same goal: to encourage customers to buy now rather than later. Here are six key points to keep in mind when offering discounts:

  • Discounts can help businesses clear inventory that is about to expire or is no longer in season. 
     
  • By offering a discount, businesses can improve their cash flow as customers are more likely to pay upfront for a discounted item than wait until the full price is due. 
     
  • Discounts can also help businesses attract new customers who may not have considered their products or services before. 
     
  • In addition, discounts can encourage customer loyalty by rewarding those who frequently purchase from the same business. 
     
  • Discounts can also be used as an incentive for employees, such as offering a bonus if they reach a certain sales target. 
     
  • Finally, discounts can help businesses build goodwill among potential customers who may appreciate the savings even if they do not make a purchase right away. 

Discounts are an important part of doing business, and when used correctly, they can provide a boost to both the top and bottom lines. Keep these six key points in mind to make the most of your next discount promotion.

Also Read: Human Resource Accounting: Concept, Objectives, and Benefits

Conclusion:

The use of discounts is a widespread marketing strategy that businesses employ to boost sales and encourage customer loyalty. Discounts can take many forms, including price breaks, coupons, and special offers. While businesses may offer discounts to customers as a way to reduce the cost of goods sold, customers also receive discounts when they purchase in bulk or during sales periods. 

The advantage of offering discounts is that it allows businesses to generate more revenue while still providing value to customers. However, the downside is that discounts can also eat into profits if they are not managed carefully. When considering whether to offer discounts, businesses must weigh the pros and cons carefully to ensure that they are making the best decision for their bottom line.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: In a journal entry, can a discount be debited or credited?

Ans:

A discount allowed by the seller is accounted for as an expense. As a result, it is debited when making accounting entries.

Q: What is the best way to record a discount in a journal entry?

Ans:

On your income statement, report the amount of total sales, discounts for an accounting period under "Less: Sales Discounts". If your small business had ₹200 in discounts during the period, report "Less: Sales discounts ₹200."

Q: What type of account is a discount?

Ans:

Accounting for a Sales Discount- The sales discount account is a contra revenue account, which means that it reduces total revenues.

Q: Is the discount received debited or credited?

Ans:

A discount allowed is recorded as either a debit or an expense, while a discount received is recorded as either a credit or income. Double-entry bookkeeping is required for cash discounts. Both are further divided into trade and cash discounts.

Q: What is a discount received?

Ans:

When a buyer purchases goods or services, the buyer receives a discount, the opposite of a discount granted. The examples just mentioned regarding discounts granted also apply to discounts received.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.