Create Your Invoice with Discount for Inventory Seamlessly.

Invoice with discount for Inventory

hi everyone in this video i'm going to walk you through the accounting for customer discounts when using a perpetual inventory system now anytime a merchandising company sells a good they get to recognize revenue for the price that they charge the customer for that good in the event that the customer is offered a subsequent discount to that price for instance if they are offered a discount to pay early pay within a certain number of days you get a certain percent um discount on the original price that that you owe um in the event that a customer is given such a discount that discount has to be recorded as a reduction to the previously recorded revenue remember the previously recorded revenue is full price now you have to record a reduction of that because the customer isn't actually paying you full price due to the discount as an example let's take a look here walmart sold green giant canned goods to customers on account for thirty six hundred dollars after customers received a 200 refund for returned goods they paid their remaining balance within a four percent discount window so walmart offered these customers a deal pay within a certain amount of time receive a four percent discount the customers have taken advantage of it all right let's think about this for a minute if we go back to what did the original sale look like okay original sale it says that walmart sold these goods to customers on account so we have an account receivable from walmart's perspective for 3 600 and then walmart got to record sales revenue for 3 600. now it says that the next thing that happened was customers received a refund for 200 worth of returned goods so let's go ahead and think about what the implications of that mean if customers receive a refund because they returned goods the debit is sales returns and allowances and customers no longer have to pay that therefore walmart needs to mark the receivable down specifically by 200 now i am leaving off half of these journal entries because there's no info in the problem for it normally when there is a sale of a good you also record the cost of goods sold and the reduction in inventory which we didn't have info for that here normally there's a when there's a refund the inventory comes back in and the cost of goods sold is then removed because that is no longer a sold good again that's out of scope for what we're talking about here which is discounts and so we haven't included that in the problem however let's now proceed to what about the discount now a customer is going to receive a four percent reduction in what they owe you because they're paying within a certain time frame all right first of all we have to figure out what exactly is the customer paying you at this point and if we think about what our t account for accounts receivable looks like it started off with thirty six hundred dollars debit it received a two hundred dollar credit for the returns and that means it currently has a thirty four hundred dollar balance in it all right customers are going to receive a four percent discount on the actual amount they owe or the thirty four hundred dollars so i'm going to pull out my calculator we're going to say 3 400 times 0.04 and that's going to total out to 136 dollars so 3 400 times 4 equals 136. this is the discount the customers are going to get because they owed 3 400 that means they're only going to pay 32.64 from walmart's perspective that means the cash coming in is going to be 32.64 however walmart is going to take the entire receivable off the books because the customer no longer owes anything on this balance but notice this journal entry is not in balance right debit says 32 64 credits is 3 400. the way we make this up is by including the sales discount sales discount is going to get debited and it's going to get debited for the amount we calculated 136 now notice our journal entry is in balance we have a total of 3 400 in the debits we have 3 400 in the credits we're receiving a discounted amount of cash we're taking care of the entire receivable because the customer no longer owes us money and this new account that we just introduced sales discount that is what's known as a contra revenue that is going to go on our income statement and reduce the original amount of revenue that we recorded now notice i have down here a what if let's just talk about that for a moment what if customers had not taken advantage of the discount window so let's just create another heading here that says no discount what if customers hadn't taken advantage of the discount well they would have had to pay walmart the full amount of money cash 3400 the full receivable would have still gone away because they paid off their debt ar 3400 that's what it would have looked like without a discount so notice the only thing that changes now between no discount and discount is the amount of cash received by the company is reduced and because the amount of cash ultimately received is reduced the revenue has to also be reduced in the flow of income if we look at kind of this this uh chart here ignore the top row for a minute if we think about a merchandising company you want to report your sales you want to take out the cost of goods sold and therefore tell investors what your gross profit is what's the profit from the actual product you sell from there you want to remove your operating expenses to ultimately calculate net income we are adding an extra informative piece now to this flow we're starting off with total sales revenue that was generated out of that comes sales returns and allowances because anything that gets returned of course reduces your sales and now this new piece what's in blue here we're also going to subtract sales discounts by taking the sales returns and the sales discounts out of total sales that gives us something we call net sales those net sales can then get subtracted from cost of goods sold gives you gross profit take out operating expenses and ultimately gives you net income again this is a contra revenue because it reduces your sales revenue it's going to go in the revenue section of the income statement it's just going to be a reduction instead of an addition and the whole point of it is to give investors insight into did you simply not make a sale or did you incentivize customers in order to make the sale all right that's it for customer discounts in a perpetual inventory system hope you found this helpful hope you join me for another video