Accounting question for debits and credits?

Question

When paying vendors, they often offer a 'term discount' if you pay within a certain period. My accounting software wants me to debit the entire amount to the expense account, and credit AP the amount after the discount, and credit the remainder to another account. Anyone know what type of account should be used for these discounts?

Answer 1

If you have different types of discounts and want to "lump" them all together in one account, e.g. cash discounts, term discounts, quantity discounts, etc. just set up a contra A/P account called "Vendor Discounts." If you want to keep track of different kind of discounts, set up separate accounts and name them accordingly.

If your software doesn't allow for contra liabilities accounts, you could just set up an income account and call it "Vendor Discounts" or "Purchase Discounts."

Answer 2

From my experience, discounts would not be recognized unless earned (paid within the terms). However, in this scenario the credit would go to a discounts available balance sheet account. This account would be categorized with the A/P account to hold the amount of the discount until earned.

When the invoice is paid, the amount of the discount would then move from this account to an discount earned account. This account is a variance/contra-expense account on the income statement. Therefore the amount paid would be debited from A/P and credited from Cash, and the discount would be debited from Discounts Available (BS) and credited to Discounts Earned (IS).

If the invoice wasnt paid within the discount terms, then the full amount of the invoice would be credited from cash, the discounted amount debited from A/P, and the discount would be debited from the Discounts Available account.

Answer 3

What you call your account is your discretion but it should be something that is clear to the people using the software or program (quickbooks, etc...). We call ours the "2 in 10 account." Meaning that we typically get a 2% discount when we pay vendors within 10 days. This works for us in house but I question it as I wonder if auditors or examiners would make sense of it.

Answer 4

You should have a discount account that would be credited with the a/p account. It is called a contra a/p account. That way you can track the amount of discounts you have taken over the year.