Discounts is a main business strategy used by many companies. The two terms allowed and received themselves in discount allowed and discount received make it easy to understand the difference between the two terms. The key difference between discount allowed and discount received is that discount allowed is granted by a seller to the buyer while discount received is when a customer is granted a discount by the supplier. Discount Allowed and Discount Received are similar to two sides of the same coin since when one party allows a discount, it becomes a discount received to the other party and vice versa.
CONTENTS
1. Overview and Key Difference
2. What is Discount Allowed
3. What is Discount Received
4. Side by Side Comparison – Discount Allowed vs Discount Received
5. Summary
What is Discount Allowed?
This is a type of discount granted to the buyer by the seller, which can be allowed in various ways as per below.
Trade Discount
A trade discount is a discount given by the seller to the buyer at the time of making a credit sale. This discount is a reduction in the list prices of the quantity sold. The main objective of trade discount is to encourage customers to purchase company’s products in more quantities. Trade discounts can be commonly seen between companies who sell products Business to Business (B2B). Since trade discount is a reduction from list price, it will not be recorded in the accounts.
Settlement Discount
Settlement discount is a discount granted for customers at the time of payment when cash is paid to complete the business transaction. Due to this reason settlement discounts are also referred to as ‘cash discounts’. Settlement discounts are widely seen in Business to Customer (B2C) transactions where the product is sold to the end customer.
E.g. X Company offers a 12% discounts for customers who settle their debts within a two-week period from the date which sale is conducted. T is a customer of X Company and purchases products worth of $10,000. ABC Ltd will record the sale as per below.
Cash A/C DR$8,800
Discount Allowed A/C DR$1,200
Sales A/C CR$10,000
Volume Discount
This is a discount granted to the buyer based on the quantity of goods purchased. This type of discount is also referred to as ‘bulk discount’. It is not beneficial for manufacturers to hold large volumes of inventory due to high holding costs; thus they prefer to sell the inventory fast, and volume discounts is an effective method of achieving this. Volume discounts can be allowed for credit sales (where the settlement will be done at a future date) as well as in a situation where both the sale and payment take place simultaneously.
What is Discount Received?
Discount received is the situation where the buyer is granted a discount by the seller. Buyers can receive discounts in the form of trade, settlement or volume discounts. The buyer can be the intermediary company/ wholesaler who purchases the products from the manufacturer to sell to the end customer. This transaction usually happens on credit basis; thus, trade\\volume discounts may be allowed by the manufacturer. The sale to the end customer generally occurs on a cash basis, and settlement discounts will be received by the customers. Continuing from the above example,
E.g. Customer T will record the Discount Received as,
Purchases A/C DR10, 000
Cash A/C CR8, 800
Discount Received A/C CR1, 200
Figure 1: Participants in the Production Process
What is the difference between Discount Allowed and Discount Received?
Discount Allowed vs Discount Received |
|
| Discount allowed is a when the seller grants a payment discount to a buyer. | Discount received is when a customer is granted a discount by the supplier |
| Allowed/Granted Party | |
| Discount allowed is granted by the supplier to the customer. | Discount received is obtained by the customer from the supplier. |
Summary – Discount Allowed vs Discount Received
The key difference between discount allowed and discount received is mainly attributable to the role of the company (supplier or customer) as the discount will be decided according to this basis. Allowing discounts helps to maintain and strengthen relationships with customers. It also assists the business to collect due monies faster and sustain sound liquidity. On the other hand, all customers do not receive discounts; previous on-timely settlements and healthy business relationships are vital to be qualified to achieve such status from suppliers.
Reference:
1. “What is discount allowed and discount received? – Questions & Answers.” AccountingTools. N.p., n.d. Web. 12 Mar. 2017.
2. “Volume Discount.” Investopedia. N.p., 12 Aug. 2010. Web. 12 Mar. 2017.
3. “What is the Difference Between Trade Discount and Cash Discount?” AccountingCapital. N.p., n.d. Web. 13 Mar. 2017.
Image Courtesy:
1. “1426592” (Public Domain) via Pixabay