Sales discounts

Definition

Sales discounts are price reductions offered by sellers to incentivize early payment from buyers. These discounts are typically expressed as a percentage of the invoice price and have specific terms for eligibility.

5 Must Know Facts For Your Next Test

1. Sales discounts are often represented in terms like '2/10, net 30,' meaning a 2% discount is available if payment is made within 10 days.
2. The primary purpose of sales discounts is to improve cash flow by encouraging quicker payments from customers.
3. Sales discounts are recorded in the sales discount account, which is a contra-revenue account that reduces total revenue.
4. When recording sales discounts, companies must adjust both accounts receivable and sales revenue accordingly.
5. Understanding sales discounts is crucial for accurate financial reporting and profitable cash management in merchandising activities.

Review Questions

Related terms

Accounts Receivable:

Amounts owed by customers for goods or services sold on credit.

Contra-Revenue Account: An account that reduces gross revenues, such as sales returns and allowances or sales discounts.

Invoice: A document issued by a seller to a buyer indicating quantities, descriptions, prices of items sold, and terms of sale.