An invoice is issued to a customer for 700, and after payment is made, the business agrees to give a discount of 150 to the customer.
To allow for the discount, the business issues a credit note to the customer for the difference of 150.
The double entry bookkeeping journal entry to show the credit note for discount allowed is as follows:
Credit Note for Discount Allowed Journal Entry
The accounting records will show the following bookkeeping transaction entries to record the credit note for discount allowed:
|Accounts Receivable (Customer)||150|
Credit Note for Discount Allowed Journal Entry Explained
The debit entry to discount allowed represents the expense (reduction in revenue) to the business of issuing the customer with a 150 discount.
The credit entry to the accounts receivable represents a reduction in the amount owed by the customer. As the original invoice for 700 has already been paid, the discount allowed cannot be allocated to the invoice, and will remain as a credit balance on the account and will either be allocated against a different invoice or repaid in cash to the customer.
Accounting Equation – Credit Note for Discount Allowed
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
|Accounts receivable||=||None||+||Retained earnings|
In this case an asset account (accounts receivable) decreases, representing a reduction in the money owed by the customer to the business, this decrease is balanced by the reduction in owners equity. The debit to discount allowed in the income statement is an expense (reduction in revenue), and reduces the profit which in turn reduces the retained earnings and therefore the owners equity in the business.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.