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Hi Sir,
My practice question recorded discount received and allowed as an expense. Shouldn’t discount received be recorded under cost of sales to give a higher gross profit?
Can you please explain? Thank you!
It depends whether the discount is a trade discount or a discount for early payment.
If it is a trade discount received then it reduces the cost of the purchases and is not recorded separately – the purchases figure is recorded as the amount actually payable (already net of the discount).
If it is a discount for early payment, then it is recorded separately but does not affect the cost of sales – it is added to the profit after calculating the gross profit.
This is all explained in my free lectures on control accounts.
The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
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