Cash discount

Accounting is just one piece of the gigantic puzzle that makes a small business successful. However, a corporate, even small business can not run smoothly without an accountant, because the hard truth is that your finance is the lifeblood of your company. These days, we received a handful of questions about cash discount. Does that an account reduce your revenue? Today’s article we will discuss the issue named cash discount.

According to VAS (Vietnam Accounting Standard) 14 – Revenues and others incomes which were issued in accordance with Decision from Ministry of Finance: “A cash discount is a reduction in the amount of an invoice that the seller allows the buyer. This discount is given in exchange for the buyer paying the invoice earlier than the normal payment date of the invoice.”
The seller shall account cash discount into account 635 – Financial expenses; The buyer account it into account 515 – Revenue from financial activities.  We may encounter the term: 2/10 net 30 in many commercial contracts. That means the invoice can be paid in 30 days, but the seller is offering a reduction of 2% of the amount of an invoice if the buyer pays for it within the first 10 days. A cash discount tends to be more favorable to the buyer than the seller because the customary terms of this activity imply a quite high-interest rate. However, a seller still uses cash discounts as a tool when he wants faster access to cash from buyers, put the money back to his business to reinvest, or simply try to reduce his investment in accounts receivable… Cash discounts are offered in order to convince credit customers to pay their bills faster.

In Viet Nam, there is a situation that is considered as cash discount: A store sells an item with the price $ 100, but allows the buyer to pay in installment in 6 months for $ 130. The $30 is store’s cash discount.

How to record cash discount in your accounting journal?

In essence, this is not revenue deduction but a financial expense. That’s to say, you do not write down the sale price on sales invoices. This is a financial expense that businesses accept to pay for buyers. The seller sets up a voucher to pay, the buyer makes a receipt to receive the payment discount. The parties shall base on receipts and payment of money to do account and determinate the CIT according to regulations and obligations (the seller shall record into expenses account, the purchaser shall record into other incomes account – guidance in Clause 15, Article 7, Circular No. 78/2014 / TT-BTC). Circular No. 78/2014 / TT-BTC issued on June 18, 2014,  of the Ministry of Finance, claimed that you do not record cash discount as a controlled expense but fully record it into the financial cost.

Accounting and Auditing season is coming, every business is running with time to finish their Finacial Statement. You must pay attention to this account to avoid errors in your accounting documents! S4B believe that choosing the right accountant can make a huge difference to your success in business. That’s why we encourage you to contact us today for free consultation.

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