There are situations where you might be in need of cash or to simply motivate your customers to pay up quicker to have some buffer when it comes to more liquid resources, you\u2019d implement something called a cash discount.<\/p>\n
The way cash discount works is simple \u2013 there\u2019s the expected payment deadline and in addition, if the customer pays earlier, say instead of the normal period that\u2019s 14 days, they pay within 7 days, they get an additional discount of 5% (the discount rate here is entirely up to you, but keep in mind that on one hand it should not be significant so that it would hurt your profits and on the other hand it cannot be too small since it wouldn\u2019t motivate any more).\u00a0<\/p>\n
When it comes to accounting such discounts you should keep in mind that there\u2019s no way of knowing how many and if any of your customers will actually use the discount. They may use it sometimes and not always. As such you ought to initially account for the sale in its gross amount and once the customer is eligible for the discount that is they did pay within the 7 days as in our example, you discount the receivable and the sales revenue similarly.<\/p>\n
Say the sale itself is in the amount of 100 and the discount rate is 5%. Your initial entry is as follows:<\/p>\n
Db Accounts receivable\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0100<\/p>\n
Cr Sales revenue\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0100<\/p>\n
Now that your customer has paid up within the 7 days, they\u2019ve paid the discounted amount which is 95. You\u2019d account for the discount (and the payment as such) as follows:<\/p>\n
Db Cash\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a095<\/p>\n
Db Sales revenue\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a05<\/p>\n
Cr Accounts receivable\u00a0\u00a0\u00a0100<\/p>\n","protected":false},"excerpt":{"rendered":"
There are situations where you might be in need of cash or to simply motivate your customers to pay up quicker to have some buffer when it comes to more liquid resources, you\u2019d implement something called a cash discount. The way cash discount works is simple \u2013 there\u2019s the expected payment deadline and in addition, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[78],"tags":[],"class_list":["post-5013","post","type-post","status-publish","format-standard","hentry","category-2-8-revenue-and-receivables"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/5013","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=5013"}],"version-history":[{"count":1,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/5013\/revisions"}],"predecessor-version":[{"id":5014,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/5013\/revisions\/5014"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=5013"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=5013"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=5013"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}