How to Calculate Discount Allowed in Accounting
Discounts are a common promotional tool used by businesses to attract customers and increase sales. When a business offers a discount, it reduces the price of a product or service, which can lead to increased customer loyalty and repeat business. In accounting, discounts are recorded as a reduction in revenue, which is known as discount allowed. In this article, we will show you how to calculate discount allowed in accounting.
Step 1: Determine the Discount Percentage
The first step in calculating the discount allowed in accounting is to determine the discount percentage. This is the percentage by which the original price will be reduced. For example, if a company offers a 10% discount on a product that originally cost $100, the discount percentage is 10%.
Step 2: Calculate the Discount Amount
Once you have determined the discount percentage, you can calculate the discount amount. This is the amount by which the original price will be reduced. To calculate the discount amount, you need to multiply the original price by the discount percentage. For example, if the original price is $100 and the discount percentage is 10%, the discount amount is $10.
Step 3: Calculate the Selling Price
After calculating the discount amount, you can calculate the selling price. This is the price at which the product will be sold after the discount has been applied. To calculate the selling price, you need to subtract the discount amount from the original price. For example, if the original price is $100 and the discount amount is $10, the selling price is $90.
Step 4: Record the Discount Allowed
Finally, you need to record the discount allowed in your accounting records. This is done by creating a journal entry that debits the sales revenue account and credits the discount allowed account. The sales revenue account is debited for the selling price, while the discount allowed account is credited for the discount amount. For example, if the selling price is $90 and the discount amount is $10, the journal entry would be as follows:
Debit Sales Revenue $90 Credit Discount Allowed $10
In conclusion, understanding how to calculate discount allowed in accounting is important for businesses that offer discounts as a promotional tool. By following the steps outlined in this article, you can accurately calculate discount allowed and record it in your accounting records.
