Discount allowed vs discount received: which one is income?

When one business pays another early, the same few ringgit are recorded twice, once in each set of books, under two names with opposite meanings. To the business being paid it is a discount allowed, and it counts against profit. To the business paying it is a discount received, and it adds to profit.

Seeing why one event is an expense in one place and income in another clears up a common puzzle.

The same event seen from two sides

A cash discount arises when a buyer settles a debt promptly and is rewarded with a small reduction. One thing happens: the customer pays a little less than the full amount, and the seller accepts it as full settlement. Each business records it from its own point of view.

The seller has given up part of the money it was owed, so it sees the discount as a cost. The buyer has kept money it would otherwise have paid, so it sees the discount as a gain.

Discount allowed: the seller gives up revenue

Suppose a customer owes RM500 and is offered a small deduction for paying early. They pay RM490, and the seller agrees to treat the debt as cleared.

The seller received RM490 but was owed RM500. It gave up the RM10 to get paid sooner. That sacrifice is why a discount allowed is a cost.

Discount received: the buyer keeps a little back

Discount received is the same RM10 seen from the paying business. It owed RM500 and was allowed to clear the debt for RM490. The RM10 it did not have to pay is a real benefit.

Nothing about the goods changed. The gain comes only from how the debt was paid, so to the buyer the discount is income.

Why one is an expense and the other is income

Every cash discount has a payer and a payee. A benefit to one is a sacrifice to the other.

The seller gave up revenue, so a discount allowed reduces its profit and is an expense. The buyer pays less, so a discount received adds to its profit and is income.

The RM10 is one amount: a loss to one business and a gain to the other.

The double entry when a discount is allowed

In the seller’s books, the customer’s debt is removed in full. Debit bank RM490, because money came in. Debit discount allowed RM10, the amount that will never be collected.

Credit the customer’s account RM500. The customer now owes nothing.

The double entry when a discount is received

The buyer’s books mirror this. Debit the supplier’s account RM500, so the debt disappears.

Credit bank RM490, the cash paid out. Credit discount received RM10, the income earned by paying early.

Where each one lands in the income statement

Neither discount touches gross profit. Gross profit comes only from buying and selling goods, sales less cost of sales. Cash discounts arise from how debts are settled afterwards.

Both appear below gross profit. Discount allowed is an expense, listed with rent and wages. Discount received is added with other income, such as rent received.

Reading the two together

A business is often both a seller and a buyer. It allows discounts to its customers and receives them from its suppliers, so both can appear in the same income statement.

They are two independent events, not two halves of one figure. One is subtracted and the other is added.

If the direction of these entries still feels slippery, one of our teachers can trace both sides of a single payment with your child. They show where each amount is debited and credited. Book a trial class to make the mirror between allowed and received feel obvious.

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 2.3 Books of prime entry (page 12).