In: Accounting
Sales discounts offered to customers reduce net income
True or False
Answer - True
Explanation -
Sales Discount is the discount that is given to the customer if the customer pays the amount within the discount period. It is also known as Cash Discount.
It is a contra - revenue account. Sales discount decreases Net Income because it decreases the Service Revenue.
For Example -
On July 1, service is provided to the customer for $ 500 by the company on 2/10, n/30 credit term.
On July 9, Payment is received for the transaction of July 1.
In reference with the illustration, payment should be done within 10 days to avail 2% discount. The customer pays on July 9 ( within discount period ) so he will get the discount.
Entry-
Cash (DR) 490
Sales discount (DR) 10
Accounts Receivable (CR) 500
Let see ,the effect on net income -
Net Sales = Gross Sales - Returns - Allowances - Discounts
= 500 - 10
= $ 490
Net Income = Total Revenues - Total Expenses
Therefore , when sales discount is reduced from sales to get net sales then revenue decreases. If revenue decreases, Net Income decreases.