Journal entry for discount received on purchase

Introduction

In business, it is common that we may receive some percentage of discount on the credit purchase when we make early cash payments. In this case, we need to make the journal entry for discount received on the purchase to record the discount received for the early payment that we have made.

This type of discount is known as the cash discount which is usually given when the customers make the cash payment on the credit purchase within the given discount period. This cash discount requires a journal entry to record the discount amount in the accounting record.

And of course, there is another type of discount that is given upon purchase which is known as a trade discount. However, we do not record this type of discount in the accounting record as it will net off with the purchase amount upon the purchase, regardless of whether the purchase is on credit or in cash.

Journal entry for discount received on purchase

Cash discount

We can make the journal entry for the discount received on purchase by debiting the account payable and crediting the purchase discounts account and the cash account.

This journal entry is made when we receive the cash discount after making the cash payment for the credit purchase that we have made within the discount period that is given.

Cash discount is the type of discount that we usually receive on the credit purchase when we make the cash payment within a discount period (e.g. within 10 days of the purchase). This type of discount usually has the stated term on the purchase invoice, such as 2/10 N/30 or 2/10 net 30, in order to encourage the customers to make payment faster.

And the “2/10 N/30” on the invoice means that the due date for the credit purchase is 30 days. However, if the customers pay within 10 days, they will receive a 2% discount on the purchase amount.

Discount received on purchase example

For example, on December 31, we have made a $10,000 credit purchase from one of our suppliers and have received the goods on the same day of December 31. There is a “2/10 N/30” term on the purchase invoice which means we will receive a 2% or $200 discount on the $10,000 purchase amount if we make the payment within 10 days.

Later, on January 8, we receive this $200 discount as we make the cash payment for the $10,000 credit purchase. Of course, we only pay $9,800 in cash as we receive a cash discount of $200.

In this case, we can make the journal entry on December 31, for the $10,000 purchases as below:

December 31:

Later, on January 8, we can make the journal entry for the $200 discount received on the $10,000 purchase by crediting the $200 amount into the purchase discounts account as below:

January 8:

Trade discount

Trade discount is the type of discount that we may receive upon the purchase. This discount is usually given when we purchase a large volume of goods or products from our suppliers.

For example, we are given a 10% discount or $1,000 on the total of $10,000 purchase that we have made. Hence, we need to only pay $9,000 in cash for the purchase upon receiving the goods.

In this case, the discount that we receive here is called a trade discount and we will net it off with our gross amount in the purchase. Likewise, we do not have a separate account for the discount like that of the cash discount.

Hence, there won’t be a separate journal entry for the discount as the discount is included in the journal entry for the purchase as below: