This video shows the difference between the gross method and the net method of accounting for Sales Discounts. Some companies offer discounts to customers for paying their bill within a specific period of time. Under the Net Method, we assume that the customer will receive the discount when we initially record the sale. Under the Gross Method, we do not assume that the customer will receive the discount when we initially record the sale.

Sales Discounts

Sales discounts occur when a company gives one of us its customers a price discount for paying its bill within a certain time frame.  If you purchase goods on credit from a supplier, your invoice might say something like, “2/10, n/30.”  This means you will receive a 2% discount off the price if you pay the bill within 10 days.  If you don’t pay the bill within 10 days, then the entire amount (with no discount) is due within 30 days.  The company offering the sales discount can account for the discount using one of two methods.  Let’s pretend we are the company that made the sale.

(1) Net Method

Under the Net Method, we assume the customer will receive the discount when we initially record the sale.  Thus, we record Sales Revenue and Accounts Receivable as if the customer had taken the discount.  If the customer does end up paying early and getting the discount, we simply debit Cash for the amount received and credit Accounts Receivable for the same amount.  If, however, the customer does not end up receiving the discount, they will pay more than we initially recorded.  We debit Cash for the full balance (without the discount) and credit the receivable.  To make the debits and credits balance, we credit an account called “Other Income” or “Sales Discount Forfeited” or “Interest Revenue.”

(2) Gross Method

Under the Gross Method, we do not assume that the customer will receive the discount when we initially record the sale.  Thus, if the customer doesn’t receive the discount and pays the full amount, we simply debit Cash for the amount received and credit Accounts Receivable for the corresponding amount.  If the customer does end up receiving the discount, however, we debit Cash for the amount received and credit Accounts Receivable. To make the debits and credits balance, we also debit an account called Sales Discounts.  Sales Discounts will then be subtracted from Gross Sales on the Income Statement to yield Net Sales.