Question

Q2. Discuss the different methods to account for cash discount. Support you answer with examples. (1 mark).

Answer 1

5iiiiiThere are 2 methods to account for Cash Discount.

1) Gross Method

2) Net Method

Let us understand both the methods with the help of examples.

1) Gross Method:-Cash discounts are not offered on cash sales, but on credit sales for making an early payment or for making payment on due date. Hence at the time of Sales, it is not possible to know whether the customer will be eligible for the discount or not. Hence we will record the sales at gross value and if at the time of payment, the customer is eligible for the cash discount, we will record the discount at that time.  

Say Mr XYZ ltd sold goods worth $100 to ABC limited on 1/1/2020. If ABC ltd makes the payment before 10/1/2020, it is eligible for 10% Cash Discount.

1/1/2020 Accounts Receivable(ABC Ltd) $100

To Sales $100

If ABC ltd makes the payment within 10 days. Say, on 5/1/2020.

5/1/2020 Cash $90

  Cash Discount $10

To Accounts Receivable(ABC Ltd) $100

If ABC ltd doesn't make the payment within 10 days, No cash discount will be recorded.

2) Net Method:- In the net method, We initially record the Sales at Net Value.

Net Sales= Gross Sales- Probable Cash Discount

Let us consider example 1 only.

1/1/2020 Accounts Receivable $90

To sales $90

If payment made within 10 Days, say on 5/1/2020.

5/1/2020 Cash $90

To Accounts Receivable $90

If payment is not made within 10 Days, Say on 12/1/2020

12/1/2020 Cash $90

To Accounts Receivable $90

   To Cash Discount Forfeited $90

Cash Discount Forfeited account is treated as in the nature of Interest revenue