What is a sales discount and when is it recognized?

• A. Not recognized until cash is received.
• B. A reduction of invoice price for early payment; recorded as a reduction of revenue; recognized when triggered.
• C. A separate asset.
• D. An operating expense.

Answer: (B)

A sales discount is an incentive offered for early payment that reduces the amount of revenue recorded from a sale. It is treated as a contra-revenue item, meaning it lowers the revenue figure rather than creating an asset or an expense. The discount is recognized only when the customer takes advantage of it—that is, when payment is made within the discount period (the trigger).

For example, if a sale is 1,000 with terms of 2/10 net 30 and the customer pays within 10 days, you record cash received for 980, debit Sales Discounts for 20, and credit Accounts Receivable for the full 1,000. The net effect is that revenue is reduced by the discount amount.

The discount is not recognized simply because cash is received at any time, nor is it an asset or an operating expense. It specifically reduces revenue and only appears in the accounts when the discount is triggered by early payment.