Provision for Sales Discount or Discount Allowed

To solicit for prompt payment from the company’s trade debtors, Cash discount which is an allowance given when payment is made within the stipulated period given.

How Do We Treat This Type Of Provision:

• As Cash discount is used frequently by companies hence, it is in reality a type of business expense which must be matched with the revenue generated (Matching/Accrual concept).

• It is therefore wrong to only take up as expenses in the Income Statement, the Sales Discount or Discount allowed only when we received the amount from our trade debtors. (Cash basis of accounting)

• Hence, similar to the provision for doubtful debt account, we need to set aside as a Provision for Discount. This will depends on the experience of the business.

However this provision can only be based on the NET DEBTORS as the discounts definitely are not allowed on delinquent customers or bad debts.

Illustration:

For year end 30/6/ 2005, details as follows:

Total Debtors                   – $100,000

Provision for Doubtful debts – $10,000

Provision for Discount Allowed – 2%

Let’s look at the Accounting treatment:

Debit: Discount Allowed ( Income Statement) $1,800

Credit: Provision For Discount Allowed $1,800

Being creation of provision of 2% on NET debtors balance of $90,000($100,000-$10,000)

Balance Sheet @ 30/6/05:

Total Debtors                      $100,000

Less:

Provision for Doubtful debts ($10,000)

Less:

Provision for Discount Allowed ($1,800)

Total Net Debtors $88,200

ASSUMING THE PROVISION FOR DISCOUNT ALLOWED HAS INCREASED IN THE FOLLOWING YEAR 30/6/2006

At year end, the details of provision have changed as follows:

Total Debtors – $150,000

Provision for Doubtful debts-$10,000( assuming no change)

Provision for Discount Allowed – 2%

Let’s look at the Accounting treatment:

Debit: Discount Allowed ( Income Statement) $1,000

Credit: Provision For Discount Allowed $1,000

Being creation of ADDITIONAL provision for discount allowed.

Workings:

Last year 30/6/05: 2% x $95,000 =$1,800

This year 30/6/06:2% x $140,000 =$2,800

Additional amount +$1,000

Balance Sheet @ 30/6/06

Total Debtors                      $150,000

Less:

Provision for Doubtful debts ($10,000)

Less:

Provision for Discount Allowed ($2,600)

($1,800+$1,000)

Total Net Debtors $137,400