Some suppliers may provide a discount when the company makes an early payment (e.g. within 10 days of credit purchase). Likewise, when the company receives the discount by paying the suppliers during the discount period, it needs to make a proper journal entry for the discount received.
The company usually creates a discount received account in order to keep track of all the discounts it receives from the suppliers. Though, the company may directly credit the expense or asset associated with the purchase for the amount of discount received instead if it doesn’t want to bother in keeping track of the discount received.
The company can make the discount received journal entry by debiting the accounts payable and crediting the discount received account and the cash account.
For example, the company ABC makes an early payment in order to receive the discount on the credit purchase that it has made in the prior week. The full amount of purchase is $5,000 and the company receives the 3% discount as it makes an early payment.
In this case, the company ABC can make the journal entry for the discount received of $150 (5,000 x 3%) with the cash payment of $4,850 (5,000 – 150) after discount as below:
It is useful to note that when the merchandising company makes the inventory purchase and receives the discount for making an early payment, it usually credit the inventory account directly for the discount received if it uses the perpetual inventory system. This is due to under the perpetual inventory system, the balance of the inventory is continuously updated when there is an inventory in or inventory out.