Cash Discount Received

A business has been invoiced by a supplier 500 for goods and services, and is given a 2% cash discount for early settlement.

The original invoice would have been posted to suppliers accounts payable account, which would therefore show a balance of 500 before the cash discount. A 2% cash discount on 500 is 10, and the amount of cash the business actually pays the supplier pays is 490.

A cash discount received, sometimes called an early settlement discount, is recorded in the accounting records using two journals. The first journal is to record the cash paid to the supplier. The second journal records the cash discount received to clear the remaining balance on the suppliers account.

Journal 1 Entry for Cash Paid

The accounting records will show the following bookkeeping entries when the cash is paid to the supplier after deduction of the cash discount received.

Journal 1 Entry for Cash paid
Account Debit Credit
Accounts payable 490
Cash 490
Total 490 490

Cash Paid Bookkeeping Entries Explained

Debit

The amount owed to the supplier (500) would have been sitting as a credit on the accounts payable account. The debit above reduces the balance on the accounts payable account to the amount of the cash discount received (10).

Credit

The cash is reduced by the payment to the supplier.

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Cash Paid Accounting Equation
Assets = Liabilities + Owners Equity
Cash = Accounts payable + None
– 490 = – 490 + 0

In this case an asset (cash) is reduced and, on the other side of the accounting equation, a liability (accounts payable) is also reduced by the payment made to the supplier.

Journal 2 Cash Discount Received Entry

The accounting records will show the following bookkeeping entries for the cash discount received when the discount is posted to clear the remaining balance on the suppliers account.

Journal 2 Entry for a Cash Discount Received
Account Debit Credit
Accounts payable 10
Discounts Received 10
Total 10 10

Cash Discount Received Bookkeeping Entries Explained

Debit

The balance of the amount owed to the supplier (500 – 490 = 10) would have been sitting as a credit on the accounts payable account. The debit above clears the amount due to the suppler and reduces the balance to zero.

Credit

The cash discount given by the supplier is a credit to the discount received account in the income statement, and reduces the expenses of the business

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business, this is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Cash Discount Received Accounting Equation
Assets = Liabilities + Owners Equity
= Accounts payable + Discounts received
0 = -10 + 10

In this case a liability (accounts payable) is reduced as the balance on the account is cleared, the discount received reduces the expenses of the business in the income statement, increasing net income, retained earnings and therefore the owners equity in the business.

Popular mdct.ru Examples

Another mdct.ru example for you to discover.

Cash Discount Received November 6th, 2016Team

You May Also Like


Related pages


calculate markup percentage formulawhat is three column cash bookclosing entries general journalgross margin vs markupwhat is the definition of bookkeepingdistinguish between trade discount and cash discountinventory turnover calculation exampledebt to value ratio calculatornon profit balance sheet template excelcalculate asset turnover ratiohow to calculate dso formulawhat is prepayment in accountingfinancial accounting exercises and solutionspercentage of completion method accountinghow to compute manufacturing overhead ratefactoring in accountingeffective annual rate earaccounting debits and creditsbookkeeping t accountsdebits and credits chartstraight line depreciation calculationaccounting journal template excelexamples of deferred tax assets and liabilitiesdeferred taxation definitionbeginning finished goods inventorycontribution margin analysis exampleyield to maturity on excelturnover calculation in balance sheetinventory average cost methodwhat is depletion expenseamortization spreadsheetpv annuity tableexample of perpetuitytimesheets templatessubsidiary ledgers exampleshow to write off inventory in quickbooksfinding ending inventoryhow to record prepaid rent journal entryshare repurchase journal entrycash withdrawal from bank journal entry in tallytrade discount series formulaworking capital efficiency ratiopetty cash expense report templatehow to calculate cumulative cash flowhow to calculate accounts receivable turnoverjournal for accountingaccounting for doubtful debtscalculating profitability indexsimple excel spreadsheet examplesaccounting closing entries processmultiple-step income statementsis merchandise inventory a debit or creditpv of perpetuityaccounts receivable days formulavalue depreciation calculatorp&l basicssmall business excel accounting templatecash book ledger formataged creditorsaccounting cogsbills payable and bills receivablefuture value interest factor annuity tableamortization straight line methodwhat is overhead absorptionbookkeeping principlesunpaid salary journal entrycalculating amortization expenseaccrued expenses liabilityexcel bond calculatorcomputing payback periodcash discount accountingpayroll accounting tutorialbookkeeping suppliescalculate debtor days