3. Are there any specific rules or regulations that must be followed when allowing a discount?
How is Discount Allowed Treated?
Introduction
Discount allowed is a term used to describe the amount of money that a company gives back to a customer after they have made a purchase. It is often used to reward customers for their loyalty and can be given in the form of cash, coupons, or other incentives. Discount allowed can be used as a way to increase sales, attract new customers, and build customer loyalty. This article will discuss how discount allowed is treated in accounting, the different types of discounts allowed, and the advantages and disadvantages of using them.
What is Discount Allowed?
Discount allowed is a form of price reduction that is given to customers after they have made a purchase. It can be used as an incentive to encourage customers to make larger purchases or to reward them for their loyalty. Discount allowed can be given in the form of cash, coupons, or other incentives such as free shipping or product upgrades. Discounts are typically given as a percentage of the purchase price and can range from 5% to 50%.
How is Discount Allowed Treated in Accounting?
In accounting, discount allowed is recorded as a decrease in sales revenue. The amount of the discount is deducted from the total sales revenue for the period and is reported as a separate line item on the income statement. The discount allowed is also reported on the balance sheet as an offset to accounts receivable.
Types of Discount Allowed
There are several different types of discount allowed that can be used by businesses. These include:
- Cash discounts – Cash discounts are discounts that are given in the form of cash back to customers after they have made a purchase. Cash discounts are typically offered as a percentage of the purchase price.
- Coupon discounts – Coupon discounts are discounts that are given in the form of coupons or vouchers that can be used to purchase products or services at a discounted rate.
- Volume discounts – Volume discounts are discounts that are given when customers make large purchases. These discounts are typically offered as a percentage of the total purchase price.
- Loyalty discounts – Loyalty discounts are discounts that are given to customers who have made multiple purchases over a period of time. These discounts are typically offered as a percentage of the total purchase price.
Advantages and Disadvantages of Discount Allowed
Discount allowed can be an effective way for businesses to increase sales, attract new customers, and build customer loyalty. However, there are some potential drawbacks to using discount allowed.
Advantages
- Increases sales – Discounts can be used to encourage customers to make larger purchases or to reward them for their loyalty.
- Attracts new customers – Discounts can be used to attract new customers who may not have otherwise made a purchase.
- Builds customer loyalty – Customers who receive discounts may be more likely to make repeat purchases.
Disadvantages
- Reduces profit margin – Discounts reduce the amount of revenue that is received from each sale, which can reduce overall profits.
- Can create price wars – If competitors offer similar discounts, it can lead to a price war that can reduce profits for all parties involved.
- Can lead to customer expectations – Customers may come to expect discounts and may be less likely to make purchases without them.
FAQ
- What is discount allowed?
Discount allowed is a form of price reduction that is given to customers after they have made a purchase. - How is discount allowed treated in accounting?
In accounting, discount allowed is recorded as a decrease in sales revenue and is reported on the balance sheet as an offset to accounts receivable. - What are the different types of discount allowed?
The different types of discount allowed include cash discounts, coupon discounts, volume discounts, and loyalty discounts.
Conclusion
Discount allowed can be an effective way for businesses to increase sales, attract new customers, and build customer loyalty. However, there are some potential drawbacks to using discount allowed such as reducing profit margins and creating price wars. It is important for businesses to carefully consider the advantages and disadvantages of using discount allowed before implementing them.