Question

Q2. Discuss the different methods to account for cash discount. Support you answer with examples.

Answer 1

	There are 2 methods of accounting for cash discount which are:
1	Gross Method:-Under this method the sales are accounted at invoice price and the cash discount is recorded when availed by customer
2	Net Method:-Under this method it is assumed that the cash discount will be availed by customer and hence at the time of making sales
	the sales is recorded at Invoice Price less amound of cash discount.
	Let's understand this by an example:
	Suppose A Ltd. Sold goods to B Ltd. at $50,000 on 22/10/2020 with payment terms of 2/10, net 30. Then B ltd paid in full on 29/10/2020
	Under Gross method the following entries will be passed:
Date	General Journal	Debit	Credit
22-10-2020	Accounts Receivable	$                                                50,000
	Sales		$        50,000
29-10-2020	Cash	$                                                49,000
	Sales Discounts	$                                                  1,000
	Accounts Receivable		$        50,000
As we can see that at the time of sales the full invoice price is recorded and the sales discounts is only recorded when the customer actually pays for the goods
within the discounted period of 10 days
	Under Net method the following entries will be passed:
Date	General Journal	Debit	Credit
22-10-2020	Accounts Receivable	$                                                49,000
	Sales		$        49,000
29-10-2020	Cash	$                                                49,000
	Accounts Receivable		$        49,000
Here at the time of sales it has been assumed that the customer will avail the discount and will pay within the discounted period of 10 days and hence the
sales has been recorded at Invoice Price less cash discounts.