Question

Jones Equipment is a private company that sells and installs HVAC systems. Jones offers payment terms of 2/10, n/30, where customers making payment within 10 days of installation will receive a discount of 2% off the purchase price or must pay the full balance due within 30 days. Jones has just received payment from a new customer who paid within the 10-day window and is thus entitled to the 2% discount. The gross sales price of the equipment and installation, before discount, was $10,000. This discount will not result in a loss to Jones on the sale of the product and service. Jones needs your help to determine when the 2% early-payment discount should be recognized and how it should be recorded—for example, as a reduction in revenue or as a cost of sales?

Explain how you located the relevant guidance, including the search method used and which section you searched within the appropriate topic

Answer 1

As per the Accounting Standard on Revenue's, a trade discount is provided at the time of delivery of goods by adjustment in the revenue and the discount is not mentioned in the journal entry. However in Jones case there were no discounts at the time of sale or product being delivered, hence this will not fall in Trade discounts.

Discount allowed at the time of receipt of cash will be recorded as a separate GL. Journal entry for the above transactions are mentioned below:

Customer A/c ................. dr 10,000

To Sales A/c 10,000

(Sales recorded)

Bank A/c..........................dr 9,800

Discount Allowed A/c.......dr 200

To Customer A/c 10,000

(Receipt of cash and discount allowed at 2%)