A sales discount is when cash is given from the seller to the purchaser for early payment of the account due.
Companies can offer either 1/2, 2/10, or 3/10 net 30 days terms. The customer who is being offered either one of these terms has 10 days to make a payment to take advantage of the applicable discount. However, the customer must pay for the goods or services no later than 30 days after the date of sale. If the customer remits after 10 days, but before 30 days, no discount is applied.
The sales discount is subtracted from gross sales in arriving at net sales. The entry is applied to the contra revenue account.
This method is used by companies who are in need of immediate cash.
Disclaimer: This blog is for information purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon.