Journal Entry for Cash Discount

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 16, 2021

What Is Cash Discount?

Cash discount is offered by sellers to buyers for making the payment within a stated number of days. The purpose of cash discount is to encourage buyers of merchandise to make payment before the due date. The percentage of cash discount is mentioned in payment terms. For example, the terms 2/10, n/30 means a 2% discount will be allowed if the payment is made within 10 days of the date of invoice, otherwise, the full amount is to be paid in 30 days.

Journal Entry for Cash Discount

Cash discount is an expense for seller and income for buyer. It is, therefore, debited in the books of seller and credited in the books of buyer. Consider the following example:

Example

On March 05, 2016, A & Co. Sells merchandise to X Retailers for $5,000 on credit. The A & Co. grants a 2% discount to all credit customers if the payment is made within 10 days of the date of invoice. The X Retailers makes the payment on March 12, 2016 and receives a cash discount promised by the seller.
Required:

  1. Make journal entries in the books of seller at the time of sale of merchandise and collection of cash.
  2. Make journal entries in the books of buyer at the time of purchase of merchandise and payment of cash.

Solution

(1). Entries in the books of seller – A & Co:
What is cash discount
(2). Entries in the books of buyer – X Retailers:

journal entry for cash discount
General journal exercise:

Building Relationships is Smart Business

Giving cash discounts is only one of the many ways you can cultivate better business relations with your buyers. See how you can do more by connecting to a financial advisor in Denver, CO or to see a full list of the areas we serve, check out our financial advisor page.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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