5.9 Discount Revenues
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A discount revenue arises when a business receives a discount from a creditor to settle an account for less than the full amount owed. There are three key characteristics of a discount revenue: 1) It represents a savings in the outflows of economic benefits for the business as they pay less cash to the creditor, 2) It decreases the liabilities of the business as the amount owed to the creditor is reduced, and 3) It increases the owner's equity of the business. To record a discount revenue, businesses must add a discount revenue column to the cash payments journal and post the total amount from this column as a credit to creditors and debit to discount revenue at the end of the period.
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5.9 Discount Revenues
- 2. Video of this presentation at… YouTube Channel for VCE Accounting
- 3. © Michael Allison. Author’s permission required for external use. A discount revenue means the business received a discount from a creditor to settle their account 5.9 DISCOUNT REVENUE Business $200 $195 Discount Revenue $5 Why is the discount recorded as a revenue? Suppliers
- 4. © Michael Allison. Author’s permission required for external use. 5.9 DISCOUNT REVENUE Revenue definition: Revenue is: 1. Inflows of economic benefits or savings in outflows of economic benefits 2. That will either: • Assets • Liabilities 3. With the ultimate effect of: • Owner’s Equity
- 5. © Michael Allison. Author’s permission required for external use. E.g. a business made a $200 cash sale 5.9 DISCOUNT REVENUE Cash Sales Characteristic #1 • There is an inflow of economic benefits • Cash will be received from the sale Characteristic #2 Assets (the Cash at Bank Asset) Characteristic #3 Owner’s Equity Cash at Bank [A] 31/1 Cash 200 Sales [R] 31/1 Cash 200 Cash at Bank [A] 31/1 Sales 200 Sales [R] 31/1 Cash 200 31/1 Cash 200
- 6. © Michael Allison. Author’s permission required for external use. E.g. a business received a $5 discount from a creditor off an account of $200 5.9 DISCOUNT REVENUE Outflows of economic benefits Outflows of economic benefits With no discount With $5 discount $200 $195 • Because of the discount, the firm will pay less cash (economic benefits) • Hence, there will be a savings in outflows of economic benefits
- 7. © Michael Allison. Author’s permission required for external use. E.g. a business received a $5 discount from a creditor off an account of $200 5.9 DISCOUNT REVENUE Characteristic #1 Characteristic #2 Characteristic #3 Discount revenue • There is a savings in outflows of economic benefits • The firm pays less cash to creditors Liabilities (the Creditors Liability) Owner’s Equity Creditors [L] 31/1 Cash 200 Cash [A] 31/1 Cash 200 Creditors [L] 31/1 Cash/Disc 200 Cash [A] 31/1 Cash 200 31/1 Creditors 195 Discount Revenue [R] 31/1 Cash 200 Discount Revenue [R] 31/1 Debtors 5 31/1 Creditors 5 Debit Credit Liabilities Debit Credit Liabilities Debit Credit Revenues Debit Credit Revenues Debit Credit Assets Debit Credit Assets
- 8. © Michael Allison. Author’s permission required for external use. Comparison of cash sales versus discount revenue Cash sales Discount revenue Characteristic #1 • There is an inflow of economic benefits • Cash will be received from the sale • There is a savings in outflows of economic benefits • The firm pays less cash to creditors Characteristic #2 Assets (the Cash Asset) Liabilities (the Creditors Liability) Characteristic #3 Owner’s Equity Owner’s Equity 5.9 DISCOUNT REVENUE
- 9. © Michael Allison. Author’s permission required for external use. This requires a new column to be added to the Cash Payments Journal Discount Revenue+ =Cash paid Total owed to Creditor 5.9 DISCOUNT REVENUE $5+ =$195 $200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Co 10 195 5 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Co 10 195 5 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Co 10 195 5 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Co 10 195 5 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Co 10 195 5 200
- 10. © Michael Allison. Author’s permission required for external use. How to use the columns? Example 1: the firm paid a creditor $200 of its account Example 2: the firm paid $180 off its account and was given a $20 discount Example 3: the firm paid $150 off its account and was given a $50 discount Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 200 0 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 200 0 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 180 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 180 20 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 180 20 200 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 150 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 150 50 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 27 Apr Wholesale Traders 10 150 50 200 5.9 DISCOUNT REVENUE
- 11. © Michael Allison. Author’s permission required for external use. At the end of the period, the discount revenue column must be “posted” to the General Ledger Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 9 Apr U. Hughes 89 1170 30 1200 28 Apr J. Kirk 90 590 60 650 30 Apr Totals 1760 90 1850 Discount Revenue [R] 30/4 Creditors 90 Creditors [L] 30/4 Discount revenue 90 30/4 Cash 1760 Cash [A] 30/4 Creditors 1760 Creditors [L] 30/4 Cash/Discount revenue 1850 5.9 DISCOUNT REVENUE Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 9 Apr U. Hughes 89 1170 30 1200 28 Apr J. Kirk 90 590 60 650 30 Apr Totals 1760 90 1850 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 9 Apr U. Hughes 89 1170 30 1200 28 Apr J. Kirk 90 590 60 650 30 Apr Totals 1760 90 1850 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 9 Apr U. Hughes 89 1170 30 1200 28 Apr J. Kirk 90 590 60 650 30 Apr Totals 1760 90 1850 or…
- 12. © Michael Allison. Author’s permission required for external use. The Bank column must equal the total of all other columns minus the Discount Revenue column Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Bank = Creditors Control Discount Revenue All other Special Columns Sundries- + + 5290 = 1250 250 1500 2400- + + GST+ 390+ Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 8 Apr Young & Co. 45 1000 250 1250 17 Apr Insurance 46 2640 2400 240 27 Apr Stock 47 1650 1500 150 30 Apr Totals 5290 250 1250 1500 0 2400 390 5.9 DISCOUNT REVENUE
- 13. © Michael Allison. Author’s permission required for external use. Summary of posting for the Cash Payments Journal… CrCr Dr Dr Dr Dr Dr Cash Payments Journal Date Details Cheque Number Bank Discount Revenue Creditors Control Stock Control Wages Sundries GST 30 Apr Totals 15850 150 1700 4000 8500 1000 800 5.9 DISCOUNT REVENUE
- 14. © Michael Allison. Author’s permission required for external use. TASK In-class Homework SQ15 X Ex5.5 X Ex5.7Ex5.6