Sales discount definition
/What is a Sales Discount?
A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. This approach is commonly used when a seller is in immediate need of cash. The inherent interest rate associated with a sales discount offer can be quite high, so more established organizations tend not to offer it to their customers.
Example of a Sales Discount
An example of a sales discount is 2/10 net 30 terms, where a customer can take a two percent discount if it pays an invoice within ten days of the invoice date, or pays full price 30 days after the invoice date. The sales discount concept can also be applied to cash sales, where a discount is offered in exchange for immediate payment.
Presentation of Sales Discount
The sales discount appears in the seller’s income statement as a contra revenue account. This means that it is paired with and offsets the reported gross sales figure, resulting in a net sales figure. This form of presentation appears in the following exhibit, which contains the top few lines from an income statement. Some sellers prefer not to break out the sales discount line item, in which case it is merged into the gross sales figure, resulting in only a net sales figure being presented.
Terms Similar to Sales Discount
A sales discount is also known as an early payment discount or a cash discount.
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FAQs
What is the Difference Between a Sales Discount and a Trade Discount?
A sales discount is a price reduction offered after a sale to encourage early payment, typically shown as “2/10, net 30.” A trade discount, on the other hand, is a reduction applied before the sale, often given for bulk purchases or to preferred customers. Only sales discounts are recorded in the accounting books, while trade discounts are excluded from journal entries.