Sales discounts offered to customers reduce net income True or False

Sales discounts offered to customers reduce net income

True or False

Solutions

Expert Solution

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.

ekkarill92 answered 1 year ago

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