Recording Sales Revenue with Discounts
Practice recording a sales transaction that includes trade discounts, sales discounts, and freight terms. This problem covers revenue recognition, accounts receivable, and contra-revenue accounts.
Problem Scenario
On March 1, ABC Company sold merchandise to XYZ Customer with a list price of $10,000. ABC offers a 10% trade discount. Terms are 2/10, n/30 (2% discount if paid within 10 days, otherwise net due in 30 days). ABC paid $500 for shipping, FOB destination.
Given Data
Requirements
- Record the sales transaction on March 1
- Record payment received on March 8 (within discount period)
- Alternatively, record payment received on March 25 (after discount period)
Solution
Step 1:
Calculate the selling price after trade discount. Trade discounts are not recorded in the accounts - they simply reduce the selling price. Selling Price = $10,000 × (1 - 0.10) = $9,000
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $9,000 | |
| Sales Revenue | $9,000 |
Step 2:
Record shipping expense. Since terms are FOB Destination, the seller is responsible for shipping. This is recorded as Delivery Expense (or Freight-Out).
| Account | Debit | Credit |
|---|---|---|
| Delivery Expense | $500 | |
| Cash | $500 |
Step 3:
If payment received March 8 (within discount period): Customer gets 2% discount. Discount = $9,000 × 2% = $180. Cash received = $9,000 - $180 = $8,820.
| Account | Debit | Credit |
|---|---|---|
| Cash | $8,820 | |
| Sales Discounts | $180 | |
| Accounts Receivable | $9,000 |
Step 4:
Alternative: If payment received March 25 (after discount period): No discount applies. Full amount is collected.
| Account | Debit | Credit |
|---|---|---|
| Cash | $9,000 | |
| Accounts Receivable | $9,000 |
Final Answer
Net sales revenue (if discount taken) = $9,000 - $180 = $8,820. Delivery Expense of $500 is a selling expense, not part of COGS.
Key Takeaways
- ✓Trade discounts reduce the invoice price and are not recorded in accounts
- ✓Sales discounts are contra-revenue accounts recorded when payment is received
- ✓FOB Destination means seller pays freight (Delivery Expense)
- ✓Credit terms like 2/10, n/30 mean 2% discount within 10 days, otherwise due in 30
Common Errors to Avoid
- ✗Recording trade discounts as a separate account entry
- ✗Recording sales discount at time of sale instead of payment
- ✗Confusing FOB Destination (seller pays) with FOB Shipping Point (buyer pays)
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Common questions about this problem type
Trade discounts are quantity or promotional discounts that simply set the actual selling price. The list price minus trade discount equals the invoice price. Only this final amount is recorded in the accounts.
You would debit Sales Returns and Allowances (contra-revenue) and credit Accounts Receivable. If inventory is returned, also debit Inventory and credit COGS.