What is Discount Allowed and Discount Received in Accounting?

What is Discount Allowed?

A discount allowed is when the seller offers a price reduction to the buyer.

For example, a shop sells goods worth £200 to a customer but offers a 10% discount for paying within 10 days.

The customer therefore pays £180 and the £20 reduction is the “discount allowed” by the seller.

Initial Price	£200
Discount Allowed	£20
Amount Owed from Buyer	£180

Benefits of Offering Discounts Allowed

There are several benefits for the seller when offering discounts allowed:

Improved Cash Flow

Offering incentives for early payments helps businesses get their cash more quickly, making it easier to fund their operations.

This helps businesses maintain a steady cash flow, reduces financial uncertainty, and allows for better financial planning and stability.

Reduced Bad Debts

Early payment incentives lower the risk of non-payment or bad debts by encouraging customers to pay sooner.

Increased Sales

Offering discounts can attract more customers and boost sales.

Bulk purchase discounts can also increase the average transaction value of a business.

For example, a customer may only need 100 units of a product at £5 a unit, but because of a bulk purchase discount, they may actually find it more beneficial to order 150 units at £4.50 a unit.

Customer Loyalty

Discounts can build stronger customer relationships, encouraging repeat business and long-term loyalty.

This creates a positive cycle where satisfied customers return, leading to consistent sales and a loyal customer base.

What is Discount Received?

A discount received is when the buyer receives a price reduction from the seller.

Continuing with the same example as above where a shop sells goods worth £200 to a customer but offers a 10% discount for paying within 10 days.

The customer therefore pays £180 and the £20 reduction is the “discount received” by the buyer.

Initial Price	£200
Discount Received	£20
Amount Owed from Buyer	£180

Benefits of Accepting Discounts Received

There are several benefits for the buyer when accepting discounts received:

Cost Savings

Discounts lower the overall cost of purchases, leading to less expenditure and higher profit margins.

By managing cash flow effectively and using discounts, businesses have more money available to run operations and invest in growth opportunities.

Improved Supplier Relationships

Paying promptly strengthens relationships with suppliers, which could lead to better terms and conditions in future deals.

This could be in the form of additional discounts, extended credit terms, and priority service. All of which will benefit the business by reducing costs and improving supply reliability.

Inventory Management

Bulk purchase discounts allow companies to buy inventory at lower prices, which is especially useful for high-demand or quick-selling products.

This helps businesses save money, ensure they have enough stock, and meet customer needs quickly.

Accounting for Discount Allowed Journal Entry

Let’s look at the discount allowed debits and credits accounting treatment from the sellers point of view, using our earlier example:

Initial Price	£200
Discount Allowed	£20
Amount Owed from Buyer	£180

Here, the seller is selling goods/services to the buyer.

Initially, when the sale is made, it is recorded at full price.

An invoice for the full amount is sent to the buyer, which includes the offer for a discount.

At this point, the discount allowed has been offered, but the seller doesn’t know if the buyer will take up the offer or not:

Sales Revenue	Credit	£200
Accounts Receivable	Debit	£200

In this example, the buyer does take up the discounted offer and pays £180.

Now the seller can apply the discount allowed:

Accounts Receivable	Credit	£200
Cash	Debit	£180
Discount Allowed	Debit	£20

Accounting for Discount Received Journal Entry

Now let’s look at the discount received debits and credits accounting treatment from the buyer’s point of view, again using our earlier example:

Initial Price	£200
Discount Allowed	£20
Amount Owed from Buyer	£180

Here, the buyer is purchasing goods/services from the seller.

Initially, when the purchase is made, it is recorded at full price.

An invoice for the full amount is received by the buyer, which includes the offer for a discount.

At this point, the discount received has been offered, but the buyer hasn’t decided if they will take up the offer or not:

Purchases/Inventory	Debit	£200
Accounts Payable	Credit	£200

In this example, the buyer does take up the discounted offer and pays £180.

Now the buyer can apply the discount received:

Accounts Payable	Debit	£200
Cash	Credit	£180
Discount Received	Credit	£20