Discount Taken


B

Barb

A vendor offers a 10% discount if invoice is paid by 10th. I will not pass
this saving on to my customer. I'm trying to decide the correct account to
post this (Discount Taken) to: Cost Of Goods Sold, Income, Expense. I
suppose it is income but it also affects the cost of goods I purchased as
well as a negative to expense.
 
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?

!-!

I presume you are not really suggesting that the discount should be
recorded 3 times.

According to my text books, this is a "payment" or "financial"
discount, not a "purchase" discount.

A payment or financial discount should be recorded either as income,
similar to interest income, or as a reduction of interest expense.
Which is more appropriate will depend on factors specific to your
business. It probably won't matter which method, so long as you are
consistent, but if you can't make your own decision you should ask
your accountant.

Such a discount does not affect your cost of inventory or cost of
goods sold because it is not an adjustment of the price of the goods,
it is based only on the timing of the payment. It's the opposite of a
penalty or interest for late payment, which you would treat as an
interest expense and not as an added cost of the goods.
 
A

Allan Martin

Barb said:
A vendor offers a 10% discount if invoice is paid by 10th. I will not pass
this saving on to my customer. I'm trying to decide the correct account
to
post this (Discount Taken) to: Cost Of Goods Sold, Income, Expense. I
suppose it is income but it also affects the cost of goods I purchased
as
well as a negative to expense.

It should not effect your cost of goods sold. The 10% discount represents
income you earn for giving up the use of your money, it is not a reduction
in the purchase price of the goods. You are under no obligation to pay
early. If you were the seller then the discount given would be treated as a
finance charge for the early receipt of cash and not a reduction in the
sales price.
 
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T

Thomas Healy

A vendor offers a 10% discount if invoice is paid by 10th. I will not pass
this saving on to my customer. I'm trying to decide the correct account to
post this (Discount Taken) to: Cost Of Goods Sold, Income, Expense. I
suppose it is income but it also affects the cost of goods I purchased as
well as a negative to expense.
It depends on the kinds of information you want to collect. If you want to
track your ability to take discounts, or to see how it benefits you, have a
separate contra-cost of goods sold account, "Purchase discounts taken." If
you don't want to track it, just credit Purchases. It shouldn't be an income
account.
 

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