Gross Method Journal Entry
Discount is the percentage of reduction on an original price. Discount rates usually vary depending on the type of product or service that you are buying. The more expensive the product or service that you are getting, the chances are higher for you to get a bigger discounted rate.
Discounts designed for specific items like cars, homes, and travel are generally well advertised. You can also choose from a wider selection of discounted items sold through warehouse stores or online marketplaces like eBay and Amazon to reduce your total cost even further.
One of the best ways for a company to sell its products is by offering them at a discount. This means that they will offer something special for an item in order to get people interested in buying it.
There are several different kinds of discounts, and each kind has a slightly different effect on buyers. Cash discount is an incentive offered by companies to customers for paying their bills early with cash or other approved forms of payment. Cash discounts are intended to encourage faster payment and boost cash flow by reducing the balance owed on a customer’s account.
When a customer takes advantage of a cash discount, they can save money while the seller will be able to have the cash faster and reduces costs associated with administrative tasks related to accounts receivable. To qualify for the discount, customers must pay within the timeframe indicated on the issued invoice.
Although not all businesses provide them, potential benefits make offering cash discounts quite attractive. A shorter payment period decreases interest expenses, the cost of collection letters, and the employees required to handle accounts receivable matters. Distributors, for example, may offer a 3 percent discount if customers pay within 10 days instead of the standard terms of net 30 days.
Companies also reduce their exposure to bad debt as well as fees paid to collection agencies. Some customers value cash discounts enough that they are willing to adjust their financial planning methods in order to receive them.
Gross method is the recording that involves entering the full price of an invoice without accounting for any cash discount. This approach assumes that the customer will not take advantage of the cash or early payment discount. The invoice is first entered at a gross amount and any discounts are accounted for later if they were applied.
Journal Entry for Gross Method
Gross method is the accounting record that company uses when selling on credit with a cash discount. The seller will provide a discount to the buyer if they settle within a defined period. On the invoice, the supplier will note the percentage of the discount and the discount period.
Under the gross method, the accountant has to record the full amount before discount. They will not take into account the estimated discount amount.
The journal entry is debiting accounts receivable and credit sale revenue.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $$$ | |
| Sales Revenue | $$$ |
It is just a normal sale transaction the company has to record sales and accounts receivable. The seller ignores the discount and waits until the customer makes the actual payment.
If the customer pay within the discounted period, so they will receive a discount from company.
The journal entry is debiting cash, sale discount,s and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Cash Discount | $$$ | |
| Accounts Receivable | $$$ |
If the customer does not take the discount, the transaction will be made as normal cash collection.
The journal entry is debiting cash and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Accounts Receivable | $$$ |
Example
ABC has designed a policy to encourage customers to pay as early as possible. They use 2/10 net 30 which means the customer will receive 2% discount if the customer settles the invoice within 10 days of receiving the invoice. The customer will be able to owe the supplier for 30 days.
During the month, company has sold to two customers as following:
- First, Sell $ 50,000 and the customer pays after 20 days and does not entitle to discount
- Second, Sell $ 30,000 and the customer pays within 10 days and receives 2% cash discount
Please prepare journal entry for the cash discount using the gross method.
Under the gross method, the company does not require to estimate the discounted amount beforehand. The company will record a normal sale transaction with the full amount.
In the first transaction, when selling goods on credit, the company has to record sale revenue and accounts receivable. The journal entry is debiting accounts receivable $ 50,000 and credit sale revenue $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 50,000 | |
| Sales Revenue | 50,000 |
The customer does not make payment early, so the company does not provide cash discounts. The customer has to pay the full amount. The journal entry is debiting cash $ 50,000 and credit accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 50,000 | |
| Accounts Receivable | 50,000 |
For the second transaction, customers make payments within the discounted period, so they will receive a discount from the seller.
When the company sells goods on credit, they have to record sales and accounts receivable.
The journal entry is debiting accounts receivable $ 30,000 and credit sale revenue $ 30,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 30,000 | |
| Sales Revenue | 30,000 |
When the customer makes payment within 10 days after the invoice date, the company will provide 2% discount.
Discount = $ 30,000 * 2% = $ 600
Customer pays only $ 29,400 ($ 30,000 – $ 600).
The journal entry is debiting cash $ 29,400, a cash discount $ 600, and credit accounts receivable $ 30,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 29,400 | |
| Cash Discount | 600 | |
| Accounts Receivable | 30,000 |
