Journal Entry for Accounts Receivable with Discount

Accounts receivable is the amount that customers owe to the company regarding credit sales.

Sale is the business transaction that company exchanges their own goods or service for cash. It is the main source of cash inflow for the company to pay for employees, suppliers, and other payments. Company expected to make a sale which is higher than all the total expense so that they will make a profit for the shareholders.

Not all sales will generate immediate cash inflow, the company makes provide credit sales to the customers. A credit sale is a way that the company sell the goods or service to customers and allow them to pay back within a certain period of time. Both seller and buyer must agree to the term of credit purchase which includes the payment date which the buyer requires to settle the balance.

Credit sales allow the company to sell huge goods to other business partners such as the retailer store who buy at a huge quantity. It will help to increase sales as well as the profit for the company.

When company offers credit sales, they will face a few problems such as lack of cash inflow, risk of bad debt. The company needs cash to pay for suppliers, employees, and other parties, so it will be a problem when most of the sales are on credit and not yet collected. It can lead to liquidation as the sale is the main source of cash flow for the company. Moreover, some accounts receivable may be uncollectible, and it will become the expense that reduces the company profit.

To solve this problem, company has to find a solution to collect the cash as soon as possible. Sales discount is one of the methods that many companies use to persuade their customers to settle accounts receive in exchange for some discount.

Journal Entry for Accounts Receivable with Discount

When the company sells on credit, they need to record revenue and accounts receivable. Even the sale term attached with the sale discount, will not impact the recording during the initial sale. We do not know if the customers will make an early payment to claim the discount or not. So the recording is the same as a normal credit sale.

Journal entry is debiting accounts receivable and credit sales revenue.

If the customers settle the accounts receivable within a discount term, they will receive a percentage of the discount.

The journal entry is debiting cash, sales discount, and credit accounts receivable.

Sale discount will present as the contra account of sale revenue which will be present on the income statement. It will reduce the net sale amount.

Journal Entry for Accounts Receivable with Discount Example

ABC is a manufacturing company that produces car spare parts for various manufacturers in the country. They have made two major sales below:

• On 01 March, Sale $ 50,000 to Mr. A on credit, he pay on 5 March.
• On 07 March, Sale $ 70,000 to M. B on credit, he pay on 25 March.

ABC provides sale to both customers with a credit term of 2/10 n/30 which mean the customer will receive a 2% discount if they settle within 10 days after purchase. The maximum credit term is 30 days.

On 01 March, ABC sold goods for $ 50,000 to Mr. A, they need to record accounts receivable and sales revenue.

On 05 March, Mr. A settle the accounts receivable with the company. He is entitled to receive a sales discount of 2% based on the term.

Sale discount = 2% * $ 50,000 = $ 1,000

He has to pay $ 49,000 instead of $ 50,000.

The journal entry is debiting cash $ 49,000, Sales Discount $ 1,000 and credit accounts receivable $ 50,000.

Sale discount will reduce the company sale from $ 50,000 to $ 49,000 as it is the sale contra account. Accounts receivable will remove from the balance sheet.

On 07 March, ABC sells goods for $ 70,000 to Mr. B on credit. Similarly, they need to record accounts receivable and sales revenue.

On 25 March, Mr. B settle the accounts receivable. It is beyond the discount term, so he has to pay the full amount which is $ 70,000.

ABC needs to make journal entries by debiting cash of $ 70,000 and credit accounts receivable of $ 70,000.