Where is sales discount on income statement

All three costs generally must be expensed after a company books revenue. Sales returns are common in the retail business. These companies allow a buyer to return an item within a certain number of days for a full refund. This can create some complexity in financial statement reporting.

Companies that allow sales returns must provide a refund to their customer. A sales return is usually accounted for either as an increase to a sales returns and allowances contra-account to sales revenue or as a direct decrease in sales revenue. As such, it debits a sales returns and allowances account or the sales revenue account directly and credits an asset account, typically cash or accounts receivable.

This transaction carries over to the income statement as a reduction in revenue. In many cases the sales return can be resold. This requires a company to make additional notations to account for the item as inventory.

Allowances are less common than returns but may arise if a company negotiates to lower an already booked revenue. If a buyer complains that goods were damaged in transportation or the wrong goods were sent in an order, a seller may provide the buyer with a partial refund.

In this case, the same types of notations would be required. A seller would need to debit a sales returns and allowances account and credit an asset account. This journal entry carries over to the income statement as a reduction in revenue. Net sales allowances are usually different than write-offs which may also be referred to as allowances.

A write-off is an expense debit that correspondingly lowers an asset inventory value. Companies adjust for write-offs or write-downs on inventory due to losses or damages. These write-offs occur before a sale is made rather than after. Many companies working on an invoicing basis will offer their buyers discounts if they pay their bills early. Discounts are notated similarly to returns and allowances. A seller will debit a sales discounts contra-account to revenue and credit assets.

The journal entry then lowers the gross revenue on the income statement by the amount of the discount. If a company provides full disclosure of its gross sales vs. Companies will typically strive to maintain or beat industry averages.

Often returns can be quickly resold without creating issues. Allowances are typically the result of transporting problems which may prompt a company to review its shipping tactics or storage methods. Companies offering discounts may choose to lower or increase their discount terms to become more competitive within their industry. Financial Ratios. Tools for Fundamental Analysis. Trade discounts are not recorded as sales discounts. They are removed directly when recording sales. In other words, the amount recorded as sales is always at net of any trade discount.

Credit terms are often stated in the following order: trade discounts, cash discounts, and credit period. And, the maximum credit period allowed is 30 days. When a customer is given a discount for early payment, the journal entry for the collection would be:. Because of the discount, the amount collected Cash is less than the amount due Accounts Receivable.

The debit made to "Sales Discount" would make the debits and credits equal. The company is given 60 days to pay the amount. This is most common when the sales discount amount is so small that separate presentation does not yield any material additional information for readers.

ABC records the payment with this transaction:. If this billing were the only invoice issued by ABC during the reporting period , and if the customer paid within the reporting period, then the revenue section of ABC's income statement would look like this:.

If the number of discounts taken by customers are few and the impact of these discounts on reported sales results are minimal, then the accounting treatment just noted is acceptable. However, what if many discounts are taken? You could have a situation where a company issues most of its invoices at the end of a month a common scenario and then customers take discounts in the following month, which reduces sales in a different period from the one in which the invoices were originally generated.

This scenario does not pass the standard set by the matching principle , where all revenues and expenses associated with a transaction should be recognized within the same period. If there is a risk that a large proportion of sales discounts will be recognized in a later period, create a sales discounts allowance account, in which you record an estimate of what the sales discounts will actually be in a later period.

By doing so, you can immediately reduce sales by the amount of estimated discounts taken, thereby complying with the matching principle.