In accounting, the discount allowed journal entry is used when a business gives a cash discount to a customer for early payment. This discount reduces the amount the customer pays and also reduces the income of the business. The journal entry for the discount allowed involves debiting the discount allowed account and crediting the debtor’s account. This shows that the business gave a discount and received less cash than expected. You will find this journal entry in the books of seller.
What is Discount Allowed in Accounting?
Many students and new learners want to understand what discounts are allowed in accounting. This part helps you understand the full meaning of it in very simple words. A discount allowed means the business gives a small amount off the total bill when the customer pays early or pays in cash. It is like saying “Thank you” to the customer for paying on time. It is a loss to the business, but it encourages quick payments.
The business sends bills or invoices to customers. These customers take goods or services and then pay money later. Sometimes the business gives a cash discount if the customer pays before the due date. This is called a discount allowed. It is important to note that this is a nominal account and is treated as an expense in the books of the business. It does not affect the cost of goods, but it affects the total cash received.
Accounting Treatment of Discount Allowed
The discount does not apply to all customers. Only customers who pay quickly get this discount. This is why every business must record it properly using the correct discount allowed accounting entry. If they don’t do this, their profit and loss account will show wrong values. The business will think they earned more, but in truth, they received less due to the discount. The accounting treatment of the discount allowed is very simple:
- Debit the discount allowed account (because it is an expense).
- Credit the debtor’s account (because the customer now pays less).
- The cash account also shows the cash received.
This is a part of the discount allowed double-entry system. You must do this whenever you give a discount to the customer. It is not a one-time process. Now that you know the discount allowed’s meaning, let us learn how to record this entry.
How to Pass a Discount-Allowed Journal Entry?
The journal entry for the discount allowed involves debiting the discount allowed account and crediting the debtor’s account. This shows that the business gave a discount and received less cash than expected. Many students get confused when they try to record journal entries. This part will help you learn how to record discounts properly with the right journal format and rules.
Discount Allowed Accounting Entry Format
Every time a customer pays early and takes a discount, you must pass this entry. It is important to remember the golden rules of accounting. Here is the basic rule:
Discount Allowed Account Dr.
To Customer’s Account
Let’s say the total bill is ₹10,000. The business allows a discount of ₹1,000 because the customer paid early. So, the customer only pays ₹9,000. The entry will be:
| Date | Particulars | Debit (₹) | Credit (₹) |
| 01-Apr-25 | Discount Allowed A/c Dr. | 1,000 | |
| Cash A/c Dr. | 9,000 | ||
| To Ram’s A/c | 10,000 |
This shows that the business allowed a ₹1,000 discount and received ₹9,000 in cash from Ram. This is how you do a cash discount allowed journal entry. Always record the full amount first and then apply the discount.
Steps to Pass the Entry
The correct way to do a journal entry for a discount allowed. Also, remember, the discount allowed accounting entry is used only in the books of the seller. The buyer will record the discount received, which is different.
- Find out the original amount of the bill.
- Check how much discount the business allowed.
- Reduce the discount from the total to know how much cash was received.
- Debit Discount Allowed Account for the discount amount.
- Debit Cash Account for the cash received.
- Credit the Customer’s Account with the full amount.
Example of Discount Allowed Journal Entry
A discount allowed means the business gives a small amount off the total bill when the customer pays early or pays in cash. In this part, you will read different examples to help you understand better. These will cover real-life situations where a business gives a discount and records it in the journal.
Discount Allowed Example 1 – Simple Transaction
A business sold goods worth ₹5,000 to Ravi on credit. Ravi paid within 5 days, and the business allowed a discount of ₹500.
Journal Entry:
| Date | Particulars | Debit (₹) | Credit (₹) |
| 05-Apr-25 | Discount Allowed A/c Dr. | 500 | |
| Cash A/c Dr. | 4,500 | ||
| To Ravi’s A/c | 5,000 |
This entry shows that the business received ₹4,500 and allowed a ₹500 discount. This is a perfect discount allowed journal entry example.
Discount Allowed Example 2 – Multiple Customers
Let’s say the business gave the following discounts in one day:
- Amit: ₹700 on a ₹7,000 bill
- Neha: ₹1,200 on a ₹12,000 bill
You must pass two separate entries for each.
Entry for Amit:
| Date | Particulars | Debit (₹) | Credit (₹) |
| 06-Apr-25 | Discount Allowed A/c Dr. | 700 | |
| Cash A/c Dr. | 6,300 | ||
| To Amit’s A/c | 7,000 |
Entry for Neha:
| Date06-Apr-25 | Particulars | Debit (₹) | Credit (₹) |
| Discount Allowed A/c Dr. | 1,200 | ||
| Cash A/c Dr. | 10,800 | ||
| To Neha’s A/c | 12,000 |
These examples show how to record a discount allowed in real cases.
Difference Between Discount Allowed and Discount Received
The difference between the discount allowed and the discount received is obvious once you understand this table. Discount Allowed is the reduction in the selling price given by a seller to a customer as an incentive for early or prompt payment. It is recorded as an expense in the seller’s books. On the other hand, Discount Received is the price reduction a buyer gets from a supplier when the buyer makes early payment. It is recorded as an income in the buyer’s books. In simple terms, the seller allows the discount, and the buyer receives it. This difference is important for proper treatment in accounting and affects profit and loss reporting.
| Basis | Discount Allowed | Discount Received |
| Who Records It? | Seller | Buyer |
| Type of Account | Expense | Income |
| Journal Entry | Discount Allowed A/c Dr. | Supplier A/c Dr. |
| To Debtor’s A/c | To Discount Received A/c | |
| Impact on Business | Reduces income | Reduces expense |
Relevance to ACCA Syllabus
Understanding the discount allowed journal entry is vital for ACCA students as it directly connects with key topics in Financial Accounting (FA), Financial Reporting (FR), and Strategic Business Reporting (SBR). Discounts affect revenue recognition, accounts receivable, and the overall presentation of financial statements. ACCA exams test your ability to recognize, measure, and report such adjustments under IFRS 15 – Revenue from Contracts with Customers, making this topic an essential part of financial statement preparation and adjustments.
Discount Allowed Journal Entry ACCA Questions
Q1: Which account is debited when a discount is allowed to a customer?
A) Accounts Receivable
B) Discount Allowed
C) Sales
D) Bank
Ans: B) Discount Allowed
Q2: What is the correct journal entry for the discount allowed?
A) Discount Allowed A/c Dr.. To Accounts Payable
B) Sales A/c Dr.., To Discount Allowed
C) Discount Allowed A/c Dr.., To Accounts Receivable
D) Cash A/c Dr., To Discount Allowed
Ans: C) Discount Allowed A/c Dr., To Accounts Receivable
Q3: Under IFRS, which standard governs the recognition of trade discounts?
A) IFRS 9
B) IFRS 13
C) IFRS 15
D) IFRS 10
Ans: C) IFRS 15
Q4: Why is a discount allowed to be treated as an expense?
A) It increases cash flow
B) It reduces liabilities
C) It decreases revenue
D) It is a cost to attract prompt payments
Ans: D) It is a cost to attract prompt payments
Q5: What effect does the discount allowed have on the Statement of Profit or Loss?
A) Increases Gross Profit
B) Reduces Total Revenue
C) Increases Accounts Receivable
D) Increases Operating Income
Ans: B) Reduces Total Revenue
Relevance to US CMA Syllabus
The US CMA syllabus emphasizes cost management and financial accounting. Discount allowed is essential in calculating net sales and receivables and assessing customer payment behavior. It’s linked to performance evaluation and decision-making, which are tested under Part 1: Financial Planning, Performance, and Analytics of the CMA exam.
Discount Allowed Journal Entry US CMA Questions
Q1: What does a discount allowed represent in cost accounting?
A) A cost reduction on purchase
B) An indirect expense
C) A loss of income
D) A marketing expense
Ans: B) An indirect expense
Q2: Which account is reduced when a discount allowed is given?
A) Bank
B) Accounts Receivable
C) Sales Return
D) Inventory
Ans: B) Accounts Receivable
Q3: In the net sales calculation, which item is subtracted from gross sales?
A) Purchase Discount
B) Freight Charges
C) Discount Allowed
D) Closing Inventory
Ans: C) Discount Allowed
Q4: How should discounts allowed be classified in financial statements?
A) Current Asset
B) Cost of Goods Sold
C) Operating Expense
D) Liability
Ans: C) Operating Expense
Q5: Why do companies offer cash discounts?
A) To increasethe product price
B) To avoid taxes
C) To promote early payments
D) To inflate receivables
Ans: C) To promote early payments
Relevance to US CPA Syllabus
For US CPA candidates, the discount allowed falls under Financial Accounting and Reporting (FAR). It plays a role in revenue recognition, receivables valuation, and proper journalizing under GAAP. CPAs must understand how such entries impact income measurement and financial statement presentation.
Discount Allowed Journal Entry US CPA Questions
Q1: Under US GAAP, how is a discount allowed reported?
A) As a current liability
B) As an operating income
C) As a contra-revenue account
D) As a deferred revenue
Ans: C) As a contra-revenue account
Q2: When a discount is allowed, which account decreases?
A) Revenue
B) Inventory
C) Cash
D) Equity
Ans: A) Revenue
Q3: What does the discount allowed journal entry affect?
A) Only the income statement
B) Only the balance sheet
C) Both the income statement and the balance sheet
D) Only the cash flow statement
Ans: C) Both the income statement and the balance sheet
Q4: What happens to net income when the discount allowed increases?
A) It increases
B) It remains unchanged
C) It decreases
D) It depends on tax rules
Ans: C) It decreases
Q5: Which journal entry is correct if a $100 discount is allowed?
A) Accounts Receivable Dr. $100
To Discount Allowed $100
B) Discount Allowed Dr. $100
To Accounts Receivable $100
C) Sales Dr. $100
To Accounts Payable $100
D) Cash Dr. $100
To Sales $100
Ans: B) Discount Allowed Dr. $100
To Accounts Receivable $100
Relevance to CFA Syllabus
In the CFA curriculum, particularly in Level I – Financial Reporting and Analysis, understanding revenue recognition and adjustments like the discount allowed is essential. It helps analysts evaluate the quality of earnings, identify aggressive revenue practices, and understand customer incentive impacts on financial health.
Discount Allowed Journal Entry CFA Questions
Q1: How does the discount allowed impact revenue quality?
A) It increases gross margin
B) It inflates revenue
C) It shows realistic revenue
D) It has no effect
Ans: C) It shows realistic revenue
Q2: What type of risk does excessive discounting indicate?
A) Liquidity risk
B) Credit risk
C) Business risk
D) Revenue recognition risk
Ans: D) Revenue recognition risk
Q3: What is the primary impact of the discount allowed on financial analysis?
A) Boosts net income
B) Distorts the balance sheet
C) Lowers accounts receivable
D) Reduces net revenue
Ans: D) Reduces net revenue
Q4: Why should analysts adjust for the discount allowed?
A) To track debt payments
B) To assess gross vs. net sales
C) To monitor dividends
D) To evaluate tax obligations
Ans: B) To assess gross vs. net sales
Q5: In financial modeling, how is the discount allowed treated?
A) As a capital expense
B) As a financing activity
C) As a reduction in revenue
D) As inventory cost
Ans: C) As a reduction in revenue
