Question

What is the proper accounting for volume discounts on sales of products?

Short answer

Any discounts or volume rebates should lower the amount of money received and the amount of money that is reported as revenue.

Step-by-step solution

Meaning of Discount

Discount refers to the amount of rebate given by a person at the time of selling some goods or rendering service to his customer. It helps the customer get the goods and services at a lower price than the market price.

Accounting for volume discounts on sales of products

A volume discount is handled as a trade discount in the accounting books. The discount is subtracted from the purchase price and is not separately reported. Let's look at an example based on the discount table above.

For example, a consumer acquired 100 units at the cost of $20 per piece. The lowered price for each unit would be $16 per unit after adding a 20% volume discount.

As a result, the buyer would debit the purchase accountfor $1,600 instead of $2,000 (calculated by deducting the $400 discount from the $2,000) and credit trade payablewith the same amount of $1,600 in their accounting records. The amount of the discount would not be displayed individually.