Discount Allowed Journal Entry
In business, the company may allow the customers to take the discount if they make the payment early (e.g. within 10 days of the credit purchase). Likewise, the company needs to account for the discount allowed with a proper journal entry when the customers take the discount by making the early payment.
As the company records the full price as the sales revenue when it makes a credit sale, it will need to reduce the sales revenue when the customer takes the discount. However, the company usually does not direct debit the sales revenue account. It usually records such a discount in the discount allowed account in order to keep track of the discount taken by the customers.
Discount allowed journal entry
The company can make the journal entry for the discount allowed by debiting the cash account and discount allowed account and crediting the accounts receivable.
Discount allowed is a contra account to the sales revenue which its normal balance is on the debit side. This journal entry will reduce both total assets on the balance sheet and the net sales revenue on the income statement by the amount of discount allowed.
Discount allowed example
For example, the company ABC receives the payment for the product it sold for $2,500 on credit in the prior week. Due to the customer takes up the early payment discount of 3% that the company ABC allowed by making the payment during the discount period, the total cash payment received is only $2,425.
In this case, the company ABC can make the journal entry for discount allowed with the cash received as below:
In this journal entry, the net balance of sales is reduced by $75 due to the customer took the early payment discount that the company ABC has provided.