Discount lost definition
/What is a Discount Lost?
A discount lost is an opportunity to take a deduction on a payment to a supplier that has offered a reduced payment in exchange for paying early. A discount lost usually occurs when the buyer either does not have sufficient funds to make an early payment, or because a processing error failed to reveal the existence of the discount offer. Discounts lost tend to represent a relatively high effective interest rate, and so are to be avoided as much as possible.
Discount Lost Best Practices
There are several best practices associated with discounts lost. They are as follows:
Determine cost-effectiveness. Someone should calculate the effective interest rate on all discount offers, to see if they make sense for the company to take advantage of.
Implement reporting. All discounts lost should be reported to the company controller, along with their effective interest rates. This can result in actions taken to ensure that the most cost-effective discounts are taken in the future.
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FAQs
How is a discount lost identified in accounting records?
A discount lost is identified when an invoice offering an early payment discount is paid after the discount period expires. Under the net method, the missed discount is recorded in a discount lost account. This entry reflects the additional cost incurred because the company failed to pay within the discount period.