What is cash discount?
Cash discount is offered by sellers to buyers for making the payment within a stated number of days. The purpose of cash discount is to encourage buyers of merchandise to make payment before the due date. The percentage of cash discount is mentioned in payment terms. For example, the terms 2/10, n/30 means a 2% discount will be allowed if the payment is made within 10 days of the date of invoice, otherwise, the full amount is to be paid in 30 days.
Journal entry for cash discount
Cash discount is an expense for seller and income for buyer. It is, therefore, debited in the books of seller and credited in the books of buyer. Consider the following example:
On March 05, 2016, A & Co. Sells merchandise to X Retailers for $5,000 on credit. The A & Co. grants a 2% discount to all credit customers if the payment is made within 10 days of the date of invoice. The X Retailers makes the payment on March 12, 2016 and receives a cash discount promised by the seller.
- Make journal entries in the books of seller at the time of sale of merchandise and collection of cash.
- Make journal entries in the books of buyer at the time of purchase of merchandise and payment of cash.
(1). Entries in the books of seller – A & Co:
(2). Entries in the books of buyer – X Retailers: