Depending on the type of business you have, you can use dozens of different types of sales discounts to boost your sales. In direct marketing, you can offer different types of discounts to attract new clients, or reward loyal ones. Direct marketing uses various forms of media, such as email, websites, mobile text messages, catalog distribution, and targeted television.
Nonetheless, it is usually advisable to use a revenue account and a contra-revenue account when recording sales. The revenue account reports the value of an original sale while the contra revenue account reports the details of any discounts, returns and allowance that reduces the value of the original sale. A contra-revenue account allows the company to see the original amount sold and also see the items that reduced the sales to the net sales amount. Sales Discounts as well as Sales Returns and Allowances are all examples of contra-revenue accounts.
When it comes to cash discounts, the seller is the one who offers the discount. The discount is recorded against the customer’s account as a reduction of their revenue, and is recorded as a debit to the sales discount cash receipts procedure contra revenue account. If the seller gives a customer a $50 discount for a thousand-dollar purchase, the entry will record a cash receipt of $950 and a credit of $1,000 to the accounts receivable account.
- However, this type of discount is not always suitable for every type of business.
- A sales discount takes place when a seller offers a reduction in the sales price to a customer as an incentive to pay an invoice within a certain time.
- EBIT less interest expense is pre-tax income, and pre-tax income minus taxes is net income.
- Contra revenue accounts can also be recorded within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue.
Customers taking advantage of the sales discount tend to reduce the overall revenue figures for the business but encourage early payments as well as reduce bad debt. Moreso, early payments support the liquidity position of the company and reduce outstanding accounts receivable. There are four main types of contra accounts such as contra asset, contra revenue, contra liability, and contra equity. The contra revenue is a reduction from the gross revenue that a business reports, which results in net revenue. Contra-revenue transactions are reported in one or more contra-revenue accounts, that normally have a debit balance contrary to the credit balance in the typical revenue account. Sales Returns Account, Sales Allowances Account, and Sales Discounts Account are the three commonly used contra revenue accounts.
The Difference Between Gross Sales and Net Sales
Most companies directly report the net sales numbers, and the derivation is given in the notes to the financial statements. However, some companies report gross and net sales both on the income statement itself. Like discounts, sales allowances are also deducted from a product’s original price; however, an allowance is deducted for a specific reason on a particular product. Discounts are generally available for every customer, but allowances are mostly applied to issues with the products or their orders. For example, if a product has a defect or damage, an allowance may be provided because that particular product is not up to the standard of other similar products ordered.
- However, some companies report gross and net sales both on the income statement itself.
- Gross sales are calculated by adding all sales receipts before discounts, returns, and allowances together.
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- If there is a large difference between both figures, the company may be giving large discounts on its sales.
The sales discount will be shown in the company’s profit and loss statement for an accounting period below as the gross revenue of the company. Another example is the 1/10 net 30, whereby the customer takes a 1% discount in exchange for paying within 10 days of the invoice date or making the full-price payment within 30 days after the invoice date. Sales revenue is the income received by a company from its sales of goods or the provision of services.
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Contra revenue accounts are presented separately from the gross sales revenue on an income statement to show the discounts, allowances, and returns that reduced the original total value of the sale to the net amount. This is more informative for the users of financial statements rather than when a net balance is reported only. That is, the reader of the income statement will be able to distinguish between the original amount of sales revenue generated, the sales reduction, and the resulting net amount. That is, a sales discount is a contra-revenue account that takes into account the value of price reductions that are granted to buyers or customers in order to encourage early payments.
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Analysts often find it helpful to plot gross sales lines and net sales lines together on a graph to determine how each value is trending over a period of time. If both lines increase together, this could indicate trouble with product quality because costs are also increasing, but it may also be an indication of a higher volume of discounts. These figures must be watched over a moderate period of time to make an accurate determination of their significance.
Because net sales depends on several components, it is important to record data accurately, typically in a ledger, so that net sales can be calculated accurately. Sales generally refers to the money earned from purchases by consumers, whereas revenue generally includes all income made by a business, including other sources besides its sales. Sales discounts may induce a company to encourage prompt payment from its customers. The sooner a company receives cash after providing a good or service, the better off it is financially.
Example of Net Sales
While it is acceptable to record and report discounts, returns and allowances within the sales revenue account–especially for very small businesses–doing so leads to the loss of valuable information and insights. For example, if your business sold a total of $50,000 worth of merchandise, but you haven’t accounted for returns, discounts, or allowances, then your gross sales would be $50,000. This simply means you sold $50,000 worth of products but it doesn’t necessarily mean your business has all that income from the sales because other deductions have not yet been considered.
If we use the example above, the cost to the business of receiving 1, days earlier than expected was the sales discount of 50. If the customer does not pay within the discount period and does not take the sales discount the business will receive the full invoice amount of 2,000 and the discount is ignored. When a business sells goods on credit to a customer the terms will stipulate the date on which the amount outstanding is to be paid. In addition the terms will often allow a sales discount to be taken if the invoice is settled at an earlier date. They are the expenses account which is reported in the income statement for the period that the allowance or discount occurs. When the difference between a business’s gross and net sales is greater than the industry average, the company may be offering higher discounts or experiencing an excessive amount of returns compared to their industry counterparts.
In bookkeeping, accounting, and financial accounting, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales. Gross sales are calculated simply as the units sold multiplied by the sales price per unit. The gross sales amount is typically much higher, as it does not include returns, allowances, or discounts.
In accounting, the terms “sales” and “revenue” can be, and often are, used interchangeably to mean the same thing. It is important to note that revenue does not necessarily mean cash received. A portion of sales revenue may be paid in cash and a portion may be paid on credit, through such means as accounts receivables.
A company may decide to present gross sales, deductions, and net sales on different lines within an income statement. Secondly, as the first item on the income statement, sales revenue is an important line item in the top-down approach of forecasting the income statement (and also why revenue is often known as the “top line”). The historic trend of revenue is analyzed, and revenue for future periods is forecasted. All expenses below sales revenue are often found expressed as a percentage of that revenue. As the first item listed on a financial statement, it becomes the pivot or anchor from which other line items are proportional to.
Many companies working on an invoicing basis will offer their buyers discounts if they pay their bills early. One example of discount terms would be 1/10 net 30 where a customer gets a 1% discount if they pay within 10 days of a 30-day invoice. Sellers don’t account for a discount unless a customer pays early so notations must be retroactive. However, if a company has not been prompt in paying their suppliers, then offering sales discounts can help alleviate the situation because now both parties are being treated equally. To illustrate a sales discount let’s assume that a manufacturer sells $900 of products and its credit terms are 1/10, n/30.