Study tips: discounts calculations (foundation bookkeeping)

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Discounts series (Foundation Bookkeeping)


This is the second article in our 3 part series on discounts.

In part 1, discount types, we discussed what they are and how we calculate them. Now we will look at:

  • how each type of discount is shown on an invoice
  • how those invoices are entered into the accounting records at the point they are sent to the customer
  • and then how the accounts are updated once a payment is received.

In part 1 we calculated the discount for a customer who was buying 3,000 units of a product which has a list price of £24.75 plus VAT per 15 units.

How discount types appear in invoices

If we offer them a trade discount of 5%, the discount will be shown on the invoice as follows:

If we offer them a bulk discount of 1% per 1,000 units, the discount will appear on the invoice as:

If we offer them a prompt payment discount of 3% if payment is received within 7 days of the invoice date, the discount may or may not be shown on the invoice, but the terms of the offer will be included instead:

Recording the discount

Once the invoice has been issued, regardless of which type of discount it includes, it needs to be recorded in the accounting records by being added the list of invoices in the sales daybook:

Trade:

Bulk:

Prompt payment:

From here, the totals will be double entered into the SLCA, VAT and Sales accounts in the general ledger. The individual total amounts will be posted as memorandums in the customer’s accounts in the subsidiary sales ledger.

The process of posting the sales daybook is the same regardless of the discount type, the only difference would be the amounts. 

For the invoice that deducted trade discount, the entries are:

Settling an invoice with a trade discount

Now let’s imagine 30 days have past and Love Outdoors Ltd have sent a payment to settle the version of invoice 269 that included a trade discount.  The invoice total has been received into the bank account and can be double entered to reduce the balance on the SLCA and clear the debt. 

In this example it’s easier to see that the invoice has been paid in full by looking at the memorandum posting in the sales ledger that duplicates the entry in the control account:

The bulk discount invoice would have been processed in the same way as the trade discount invoice and would also result in the debt being settled in full. Therefore bulk and trade discounts alter the calculations for sales and are shown on sales invoices, however, once those invoices enter the accounting records the discount no longer features in their recording or processing.

Settling an invoice with a prompt payment discount

We’re going to turn back the clock in our ‘what if’ scenario now and look at what would have happened in the accounts if the version of the invoice that offered the prompt payment discount had been issued.

The postings are the same as before, only the amounts are different when the entries are made from the sales daybook. However, when we look at the bank receipt we can see that Love Outdoors Ltd sent a payment of £5,761.80. 

Let’s assume this payment was received 5 days after the invoice date and was in full settlement of the invoice, which was for £5,940.

The accounting entries are the same as for other invoices, however, now we have a discrepancy between the amount invoiced and the amount received. 

The discrepancy is in both the SLCA and the customer’s account but it is easier to see in this example, that the invoice in Love Outdoors Ltd’s account is not clear but in fact showing that £178.20 is still outstanding.

The £178.20 is the 3% discount and in part 3 we will look at how to:

  1. check that the discount was allowable
  2. raise a credit note for the discount
  3. record the credit note in the discounts allowed daybook
  4. post the entries in the ledger accounts

Read part 3 – posting the discount now.

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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