What account should discounts be recorded to?

We are having a debate, when some one uses a coupon that reduces the price of services or products purchased, should the discount be against the cost of sale or in a expense account?





Thanks!
What account should discounts be recorded to?
When using the perpetual inventory system, when merchandise is purchased it is a debit to merchandise inventory and a credit to accounts payable. If the discount offered is taken, it is a debit to merchandise inventory to reduce the cost of the merchandise.





example:





dr merchandise inventory 1,000.


cr accounts payable 1,000.





discount 2/10 n/30





dr accounts payable 1,000.


cr cash 980.


cr merchandise inventory 20.





If the perodic inventory system is used when a purchase is made you would debit purchases, and credit accounts payable. If the discount is then taken, you use a conta account to purchases called purchases discounts.





example:





dr purchases 1.000.


credit accounts payable 1,000.





discount 2/10 n/30





dr accounts payable 1,000.


cr cash 980.


cr purchases discounts 20.





To the seller, the entry under perpetual, to record the discount, would be to a contra account to sales called sales discounts.


(supposing the cost of goods sold are 650.)





dr accounts receivable 1,000.


cr sales 1,000.


dr cost of goods sold 650.


cr merchandise inventory 650.





discount taken by the buyer 2/10 n/30 (sellers entry):





dr cash 980.


dr sales discounts 20.


cr accounts receivable 1,000.





Under perodic the entry for the seller receiving payment, less the discount would be the same as perpetual.





This is the gross method of recognition by both the buyer and the seller.


There is also a net method of recognition. We'll save that for another time.





And to directly answer your question, for the seller, the discount is against the sale. But it is recorded in a contra account (sales discounts). The sales account should be left alone so it will reflect the total sales for the period.;.
Reply:If the company is using the coupon then use the contra purchases account called "Purchases Discount" this will get you to Net Purchases (actual cost) for the merchadise purchased.





It usually follows "Purchases" on the Income Statement and Trial Balance.





Dr. - Purchases $1,000


Cr. - Purchases Discount $100


Cr. - Accounts payable $900








**********





If it is the customer using the coupon, the use the contra sales account "Discounts and Allowance" and leave Cost of Goods Sold alone. The actual cost of selling the item hasn't changed.





It usually follows "Gross Sales/Revenue" on the trial balance or income statement.





Dr. - Cash $950


Dr. - Discounts and Allowance $50


Cr - Gross sales $1,000
Reply:You *could* just record it as a debit against Sales but I'd want to put it in a separate account so I could keep track of it and not have it affect my gross sales totals.





I'd put it in a separate expense account in the Cost of Goods Sold section of the profit and loss statement.
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