Sales Discounts
A sales discount is an incentive the seller offers in exchange for prompt payment on
credit sales. Sales discounts are recorded in another centra-revenue account, enabling
management to monitor the effectiveness of the company's discount policy. Invoices
generally include credit terms, which specify when the customer must pay and define
the sales discount if one is available. For example, the credit terms on the invoice below
are 2/10, n/30, which is read “two-ten, net thirty.”
The terms 2/10, n/30 mean the customer may take a two percent discount on the
outstanding balance (original invoice amount less any returns and allowances) if payment
occurs within ten days of the invoice date. If the customer chooses not to take the
discount, the outstanding balance is due within thirty days. An abbreviation that
sometimes appears in the credit terms section of an invoice is EOM, which stands for end
of month. The terms n/15 EOM indicate that the outstanding balance is due fifteen days
after the end of the month in which the invoice is dated.
If Music World returns merchandise worth $100 after receiving a $1,000 order, they still
owe Music Suppliers, Inc., $900. Assuming the credit terms are 2/10, n/30 and Music
World pays the invoice within ten days, the payment equals $882, an amount calculated
by subtracting $18 (2% of $900) from the outstanding balance. To record this payment
from Music World, Music Suppliers, Inc., makes a compound journal entry that increases
(debits) cash for $882, increases (debits) sales discounts for $18, and decreases (credits)
accounts receivable for $900.