Discount Allowed

Definition of Discount Allowed

Discount Allowed refers to a reduction in the amount payable by a customer as an incentive for certain behaviors such as early payment or bulk purchasing. The goal is to encourage timely payment and large volume purchases. In accounting, this discount is recorded as an expense and is shown in the profit and loss account, thereby reducing the company’s total revenue for that period.

Key Points:

• Encourages early payments and bulk orders.
• Recorded as an expense.
• Shown in the profit and loss account.

Examples

1. Prompt Payment Discount: A company offers a customer a 2% discount on the invoice amount if the payment is made within 10 days. For a $1,000 invoice, the customer would pay $980 if payment is made promptly.
2. Bulk Purchase Discount: A retailer offers a 5% discount on orders over 1000 units of a product. A client purchasing 1200 units of the commodity priced at $10 each would receive a $600 discount, paying $11,400 instead of $12,000.

Frequently Asked Questions (FAQs)

Q1: Is Discount Allowed reflected in the revenue section of the income statement? A1: No, Discount Allowed is usually reflected as an expense in the profit and loss account, reducing the company’s total revenue.

Q2: What is the difference between Discount Allowed and Discount Received? A2: Discount Allowed is given by the company to its clients, acting as an expense. Discount Received, on the other hand, is received by the company from its suppliers, reducing the company’s expenses.

Q3: Why do companies offer discounts like these? A3: Companies offer these discounts to incentivize quick payments and increase sales volumes. This can improve cash flow and reduce inventory holding costs.

Q4: Can discounts allowed affect the profit margins of a company? A4: Yes, offering too many discounts or large discounts can significantly impact the profit margin since it reduces the gross revenue.

Related Terms with Definitions

1. Discount Received: This is a reduction in expense granted to a company by its suppliers for early payment or bulk purchasing, recorded as a gain in the profit and loss account.
2. Trade Discount: A discount on the listed price of goods or services offered by sellers to buyers, generally not recorded separately in accounting records.
3. Cash Discount: Similar to a prompt payment discount, it is offered to customers for paying their dues before a set deadline.
4. Profit and Loss Account: A financial statement summarizing the revenues, costs, and expenses incurred during a specified period, showing net profit or loss.

Online References

1. Investopedia – Cash Discounts
2. AccountingTools – Discount Allowed
3. Corporate Finance Institute – Accounts Receivable Discount

Suggested Books for Further Studies

1. “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
2. “Financial Accounting, 10th Edition” by Walter T. Harrison Jr. and Charles T. Horngren
3. “Advanced Accounting” by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Ken A. Smith

Accounting Basics: “Discount Allowed” Fundamentals Quiz

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