Question regarding Discounts

Consult with your accountant.

Typically, a customer's discount on your sales is associated with an expense account called Customer Discounts or Discounts on Sales. Your discount with one of your suppliers is associated with a COGS account called Purchase Discounts.

However, I would consult with your accountant on how they want such items handled. If you do not have an accountant, get one.

Thanks - the info was very useful, thankyou.

I'm not sure what is "typical", but I've seen customer discounts treated as a reduction of sales about equally as often as an expense.

I agree with both Allan and Stephanie - consult your accountant. Aside from "how they want it handled", there may also be significant sales tax issues.

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I have dealt with quite a few accountants in my employment and in my contract work for several bookkeeping/accounting services run by accountants. Each one has preferred to keep Sales Discounts separate from a simple reduction in Sales. I would think posting discounts given as a reduction in sales gives a false view of actual sales figures.

Also, depending on whether, at least in Canada, you are operating as a proprietor, partnership, or corporation, you may want to break out discounts given to customers as a separate line item on your income statement rather than simply a reduction in sales. Come tax time or year end review engagements, your accountant can let you know whether or not you are giving TOO MUCH as a discount based upon gross sales and cost of goods.

Personally, I like a LITTLE bit more detail. EG in a construction company, I prefer to keep purchases of small tools (expense), equipment rentals (an obvious expense) or purchase of tools of a material value (eg. a compacting machine costing 3500) separated. This lets me know if I am spending large sums on equipment rentals when it would be more cost efficient to purchase the equipment. EG renting pneumatic drills totalling $4500 for the year when we could have purchased 2 for the same money and been able to use them 2 to

Just my little bit of hair splitting.

I agree about providing information, but discounts can be shown in a separate income account rather than in an expense account.

I don't agree that this necessarily distorts sales. When discounts are given routinely they are effectively just a price adjustment and I think in such circumstances this is a sales reduction, not an expense. We accountants do a lot of hair splitting.

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Most accounting books will show the Sales Discount line as a separate income line. I have never seen Sales Discount shown as an expense.

Ok, perhaps the discounts I am thinking of are Prompt Payment Discounts, eg.

If you are offering an item or invoice discount, then that would be categorized as a reduction in sales as this is a per invoice or item reduction.

The textbook teach you to use the same Contra Income account for the Prompt Payment discounts. It is still a reduction to your income no matter what the reason.

I don't know about "most" accounting books, but I have certainly seen several that suggest that a payment discount might be considered a financial expense as Stephanie suggests, rather than a reduction of income. I think it's reasonable to consider a customer or item discount as a price adjustment and thus an income item, while treating a payment discount as a financial expense.

In any case, the primary recommendation made by Allan, Stephanie and me, is to consult your accountant. Aside from the accountant's "preferences", there may also be sales tax considerations. Once more, with feeling: consult your accountant.

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