Sales and Purchase Discounts
 Discounts are offered to people who buy on account
 either from you – Sales Discounts
 Or from someone else – Purchase Discounts
 The purpose is to encourage people to pay sooner
 Think about it: an Accounts Receivable is your money in the hands of someone else – you want your money now!

Sales and Purchase Discount
Rules
Rule
1.
Discounts only occur when cash changes hands
2.
Discounts always appear on the same side as cash
Reason
1.
This is the only time you know for sure that someone has paid within the discount period
2.
This is because you are accepting less cash for the discount

Sales and Purchase Discount
Rules cont.
Rule
3.
The Discount only affects Cash
Reason
3.
Same as previous
4. Discounts are calculated on total amount owing
4.
Must pay total amount in order to receive discount

Sales and Purchase Discounts
 There are 2 new accounts we will be using for recording Discounts
1.
Purchase Discount (When you buy)
 This is a Contra–Expense Account
Therefore this has a
Credit Balance
2.
Sales Discount (When you sell)
1.
This is a Contra–Revenue Account
Therefore this has a
Debit Balance

Sales and Purchase Discounts
 One last thing about Discounts
 What are “Terms”? How do we ‘read’ them?
 What does 2/10, n30 mean?
2% Discount
If paid within
10 Days
With 30 Days to pay without penalty

Discounts
An Example
 Jan. 10 – We bought a $1000 worth of supplies on account. Terms are 2/10, n30.
 Write this information down!
Date Particulars Debit Credit P.R.
2
3
1
Jan 10 Supplies 1000
Accounts Payable 1000
Bought supplies, Terms
2/10, n30.
1
2
3

Purchase Discounts
 Let’s now say that we want to take advantage of the “Discount” and pay within the allotted time period (in this case it is 10 Days to receive a 2%
Discount)
Date Particulars Debit Credit P.R.
3
2
1
Jan 18 Accounts Payable 1000
Cash 980
Purchase Discounts 20
1
2
3

Sales Discounts
 Let’s take the same question, only now we sold instead of bought
 Jan. 10 – We sold $1000 worth of Supplies on account. Terms are 2/10, n30.
Date Particulars P.R.
Debit
3
2
1
Jan 10 Accounts Receivable 1000
Sales Revenue 1000
Sold $1000 to J. Doe
Credit
1
2
3

Sales Discounts
 Again, it is now within the 10 Days and our customer has chosen to take advantage of the Discount
Date Particulars P.R.
Debit Credit
3
2
1
Jan 18 Cash 980
Sales Discount 20
Accounts Receivable 1000
1
2
3

Purchase Discounts
 If the transaction was for cash (when you bought supplies) and the discount was taken right away, it would look like this
Date Particulars Debit Credit P.R.
3
2
1
Jan 10 Supplies 1000
Cash 980
Purchase Discount 20
1
2
3

Sales Discounts
 If the transaction was for cash (when you sold supplies) and the discount was taken right away, it would look like this
Date Particulars Debit Credit P.R.
2
3
1
Jan 10 Cash 980
Sales Discount 20
Sales Revenue 1000
1
2
3

The Merchandising Company- Sales and Purchase Discounts
New Account
1. Merchandise Inventory
2. Sales
3. Sales Discounts
4. Sales Returns &
Allowances
5. Purchases
6. Purchase Discounts
7. Purchase Returns &
Allowances
8. Freight In
9. Freight Out (Delivery
Expense)
Type of Account
Current Asset
Revenue
Contra-Revenue
Contra-Revenue
COGS (expense)
COGS (Contra-Expense)
COGS (Contra-Expense)
COGS (expense)
Operating Expense

Discounts & the Perpetual
System
 Your textbook will be assuming the periodic system
 As you are aware by this point in the unit, the use of perpetual inventory systems is becoming more popular as technology advances
 We MUST understand the difference between the two systems

The Perpetual System
 There is no Purchase Discount account under perpetual (Remember, no
COGS section on I/S)
 Pay for Inventory within the discount period. $1000 2/10, n30
 Transaction:
Accounts Payable
Cash
Inventory
1000
980
20

The Perpetual System
 There is a Sales Discount account under the perpetual system
 Therefore, sales discounts are treated the same under both systems
 Sold Inventory for $1000 2/10, n30 and they pay within the discount period
Cash 980
Sales Discount
Accounts Receivable
20
1000

Sales Discounts –Income
Statement
 The total of Sales Returns and Allowances and Sales Discounts is subtracted from sales
 Example:
 For the month of June, Warrendon`s total sales were $62,000. Some customers returned merchandise (sales returns of $1,500), the amount of sales for the month must be decreased by $1,500. Sales Discounts of $500 were given to customers for early payment, sales must also be decreased by $500.

Sales Discounts –Income
Statement
 Both Periodic & Perpetual
Warrendon Sports
Partial Income Statement
For the month ended June 20, 20-
Revenue
Sales $62, 000
Less: Sales Returns and Allowances $1,500
Sales Discounts $500 $2,000
Net Sales $60,000

Sales & Purchase Discounts
Homework
 Page 311, 9B, 10B
 Page 312, 12B,C
 Page 316, 16B