In everyday business activities, discounts are granted and accepted. Such discounts will save money or promote payments for speed. A company that gets a discount from its supplier, will show that as “discount received” in its accounts. It is a reduction in the price of a good or service. The journal entry of discount received records such a transaction. A discount received journal entry is a journal record in which a business receives a discount from the creditor or supplier they owe money to, generally for paying their debts in advance or for making bulk purchases. This journal entry decreases the payable and increases income.
What is a Discount Received?
A discount received is the amount saved by a business when a bill is paid early or in full. Sellers or suppliers use this discount to encourage prompt payment or high-volume purchases. The benefit is passed on to the new buyer who books the same as income. This is different than giving a discount to a customer. That is known as discount allowed. In contrast, an enterprise records a discount received when the enterprise saves by paying less than what is owed to a creditor.
Types of Discounts Received
There are different kinds of discounts available to businesses:
- Trade Discount – This is the discount received on the purchase itself. This is not registered in the case of journal entries by firms as it is directly deducted from the invoice.
- Cash Discount – That is the key factor in accounting. The business is given a cash discount if it pays within a specified time.
Example:
Let’s say:
- You purchase items worth ₹10,000 from a vendor.
- If you pay within 7 days the provider discount 5%.
- You pay ₹9,500 on time.
Your savings of ₹500 are the discount received.
So, in this case, you will pass discount received journal entry of ₹500.
Discount Received Journal Entry
Now that you know what it means, let us look at how to record the discount received journal entry in the books of accounts. This entry reveals the actual profit or savings achieved. Discounts reduce the cost of the purchases you do make. Since this is an income you have to credit this amount in the “Discount Received” account. This includes debiting the total amount from the credit and crediting the paid cash.
Format of Journal Entry
Understanding with an example:
Example:
Purchases from Mr. X ₹5,000 Refunds were ₹4,800 paid in cash Business and ₹200 discount
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| 01-04-25 | Mr. X A/c DrTo Cash A/cTo Discount Received A/c | 5,000 | 4800200 |
This format clearly demonstrates that you underpaid, and you received a benefit.
Key Points
- Cash Paid advances to Cash Account.
- Credit on received voucher goes to income side.
- The entire price of acquisition is credited to Creditor’s Account.
Discount Received Journal Entry in Tally
Indian students and any business prefer a widely used accounting software, Tally. If you are following the steps correctly, Recording discount received journal entry in Tally is simple.
Steps to Record in Tally:
- Open Tally and head to Accounting Vouchers.
- Select Journal Voucher (F7).
- Charge the Creditor’s Account with … in total.
- On how much cash you actually paid, credit the Cash Account.
- Record the discount in the Discount Received Account
Example
Shyam paid cash ₹ 4,800, discount allowed ₹200.
Voucher Entry in Tally:
- Dr. Shyam A/c ₹5,000
- Cr. Cash A/c ₹4,800
- Cr. Discount Received A/c ₹200
This entry simply registers the cash as well as the got benefit in the application.
Discount Allowed and Discount Received Journal Entry
Do not confuse the discount allowed with the discount received. One is a cost and the other is revenue.
- Discount Allowed- And you pass this discount on to your customer. It reduces your income.
- Discount Received- This is a discount you receive from your supplier. It increases your income.
Example of Both:
- Ram paid cash ₹9,800 and ₹200 discount given.
Journal Entry:
- | Ram A/c Dr. ₹10,000
- To Cash A/c ₹9,800
- To Discount Allowed A/c | | 200|
- Shyam-Paid cash ₹9700 and gets ₹300 discount.
Journal Entry:
- | Shyam A/c Dr. ₹10,000
- To Cash A/c ₹9,700
- To Discount Received A/c ₹300 |
In this manner both sides of picture are shown, and these received cash from Ram and discount allowed journal entry and cash paid to Shyam discount received journal entry.
Cash Discount Received Journal Entry
A cash discount is an incentive for early payment. It makes payments prompt and cost effective as well. This savings is recorded in the cash discounts received journal entry.
When to Use
- You pay before the due date.
- The supplier gives you a discount to pay in full.
Example:
Received goods worth ₹20,000. Paid ₹19,500 early. Received ₹500 cash discount.
Entry:
Supplier A/c Dr. ₹20,000
To Cash A/c ₹19,500
To Discount Received A/c ₹500
This entry records how much was saved for early payment.
Bills Receivable Discounted Journal Entry
A bill discounting process is where a business uses a bill receivable before its due date by handing it over to the bank and getting cash against it. Is the bank charging fee or interest fees? This is a special case.
Example:
Bills receivable amounting to ₹10,000 endorsed to bank. Bank credited ₹9,800. ₹200 is a discount.
Entry:
- Bank A/c Dr. ₹9,800
- Discount A/c Dr. ₹200
- Bills Receivable A/c Dr ₹10,000 |
This entry captures the cash received along with the discounting cost. This is the bills receivable discounted journal entry.
Received from Krishna Allowed Him Discount Journal Entry
This is opposite of a discount received. Here you give someone a discount while taking the money. The journal entry to record receiving payment from Krishna with a discount allowed would debit Cash/Bank account, debit discount allowed and credit krishna’s account.
Example:
Received ₹4,900 from Krishna and gave a discount of ₹100.
Journal Entry:
- | Krishna A/c Dr. ₹5,000
- To Cash A/c ₹4,900
- Discount Allowed A/c ₹100 |
This is the received from Krishna allowed him discount journal entry, and it is also fed in business accounts.
Received Cash and Allowed Discount Journal Entry
This is analogous to the Krishna example. They record both the receipt of money and the granting of a discount in the journal. Here is the entry for cash received and allowing discount is shown in the example as:
Example:
Paid ₹1,950 on a ₹2,000 bill, gave himself a ₹50 tip
Entry:
- | Customer A/c Dr. ₹2,000
- To Cash A/c ₹1,950
- To Discount Allowed A/c ₹50 |
This journal entry is known as the received cash and allowed discount journal entry.
Relevance to ACCA Syllabus
ACCA syllabus is related to right financial accounting practices and reporting. The discount received journal entry is also significant for the students who learn to prepare the books of accounts correctly, particularly for the Financial Accounting (FA), Financial Reporting (FR), and Audit and Assurance (AA) papers. It is the backbone for correct reporting of income and liabilities.
Discount Received Journal Entry ACCA Questions
Q1: When a business gets a discount from their supplier which account is being credited?
a) Discount Allowed
b) Sales
c) Discount Received
d) Purchase Returns
Answer: c) Discount Received
Q2: In what way is a discount received impacting the Profit and Loss Account?
a) It increases expenses
b) It reduces liabilities
c) It increases income
d) It reduces assets
Answer: c) It leverages income
Q3: Which of the following is the best representation of a discount received journal entry?
a) Debit Purchase, Credit Discount Receive
b) Debit Supplier, Credit Cash and Discount Received
c) Discount Recd a/c dr to Bank a/c
d) Debit SalesAC, Credit SupplierAC
Answer: b) Debit Supplier, Credit Cash and Discount Received
Q4: Which of the following is true for discount received in double-entry bookkeeping?
a) It is deducted from the supplier’s account
b) It is an income and is credited
c) It is part of the drawings
d) It adds to the purchasing power
Ans: b) It is an income and credited.
Q5: What if the discount received not Journaling?
a) Profits will be overstated
b) The purchase will be understated
c) Cash will be understated
d) Profits are understated
Ans: d) Profits will be understated
Relevance to US CMA Syllabus
For Part 1: Financial Planning, Performance and Analytics, for example, the US CMA syllabus covers areas such as journal entries, cost management, and the decision-making process. The discount received journal entry has an important role for cash flow optimization, payables management, and cost-saving analysis.
Discount Received Journal Entry US CMA Questions
Q1: Management reporting – received discount is favorable|
a) Cost
b) Asset
c) Income
d) Equity
Answer: c) Income
Q2: A cash discount received impacts working capital how?
a) Raises the short-term debt
b) Reduces expenses
c) Decreases cash outflow
d) Increases net sales
Answer: c) Reduces cash outflow
Q3: Why do companies do this to get discounts for paying early?
a) To avoid taxes
b) To increase purchase value
c) To reduce payments and make more money
d) Replenish the pool of suppliers
Answer: c) In order to reduce payments and boost profit
Q4: Gift received for discount that has not been amortized, please.
a) No effect
b) Net income decreases
c) Net income increases
d) Depends on inventory
ANSWER: c) Net income increases
Q5: When it comes to budgeting, how to treat discount received?
a) Increase cost of goods sold
b) Pay suppliers less cash
c) Ignore it completely
d) Add it to revenue
Answer: b) Reduce cash paid to suppliers
Relevance to US CPA Syllabus
The US CPA Exam demands a very thorough understanding of how transactions are to be recognized according to US GAAP, especially on the Financial Accounting and Reporting (FAR) section of the exam. A discount received journal entry ensures that we recognise our liabilities and revenues accurately.
Discount Received Journal Entry US CPA Questions
Q1: Discount received on purchase should be recorded as per GAAP?
a) Increase purchase price
b) Reduce inventory cost
c) Increase liabilities
d) Add to equity
Answer: b) Reduction in inventory cost
Q2: At the time of early payment and receiving discount, following journal entry will be made:
a) Debit Discount Received
b) Credit Discount Received
c) Debit Cash
d) Credit Accounts Receivable
Answer: b) Credit Discount Received
Q3: What best describes the purpose of discount received journal entry?
a) Reduce receivables
b) Recognize accrued expenses
c) Record a gain on payment
d) Record a purchase discount
Answer: d) Journalize a purchase discount
Q4: Under US GAAP, Discount Received is an income account.
a) Revenue
b) Liability
c) Other income
d) Expense
Answer: c) Other income
Q5: Which financial statement reflects discount received?
a) Balance Sheet
b) Income Statement
c) Statement of Retained Earnings
d) Statement of Cash Flows
Answer: b) Income Statement
Relevance to CFA Syllabus
The CFA Program, and particularly Level 1 (Financial Reporting and Analysis) is all about digesting the structure of and reading financial statements. CFA candidates analyze operational effectiveness and margin improvements with knowledge of discount allowed journal entry.
Discount Received Journal Entry CFA Questions
Q1: From an analyst perspective, discount received is improved:
a) Net sales
b) Gross margin
c) Operating income
d) Return on assets
Answer: c) Operating income
Q2: Reflecting on ‘discount received’ recorded in income statement
a) Other comprehensive income
b) Extraordinary item
c) Operating income
d) Non-operating income
Answer d) Non-operating income is the Correct Answer.
Q3: The ratio that will be directly affected when frequent discount received is passed due.
a) Debt-equity ratio
b) Accounts payable turnover
c) Return on equity
d) Inventory turnover
Answer: b) Accounts payable turnover
Q4: What does repeated use of discounts from suppliers imply regarding the liquidity of a firm?
a) Liquidity is poor
b) Liquidity is strong
c) Cannot be assessed
d) Liquidity is falling
Answer: b) The liquidity is strong
Q5: How would the financial analyst treat discounts received in assessing the company’s performance?
a) To be included under financing activity
b) Adjust purchase costs
c) Add to other revenues
d) Ignore in analysis
Answer: c) Add them to other revenues
