 Hello, in this lecture we're going to define sales discount. According to fundamental accounting principles, while 22nd edition, the definition of sales discount is term used by a seller to describe a cash discount granted to buyers who pay within the discount period. So we are talking about a discount, a reduction of the sales price. The confusing thing with discounts often is, are we the person giving the discount or the person receiving the discount? When we talk about the sales discount, we're often putting ourselves in the shoes of the seller. We are the seller granting the discount to the purchaser. Let's take a look at an example. We are the owner here on the left hand side making a sale of our inventory to a customer in this case. We're selling the sales price for $8,450. That's going to be the sales price of the items that we are selling. We're receiving not cash at this point, but an IOU. When we put this transaction on the books, we may have the terms that could look something like this, 2 slash 10 in slash 30, meaning 2% discount if the customer pays within 10 days. Otherwise, we want payment within the normal terms of 30 days. If that's the case, we usually put it on the books when we make the sale as if we don't have the discount of time period, meaning we're going to put the entire sticker price on the books. If then the customer then paid within the discount of time period, meaning the customer then paid within the 10 days, we would have to account for that 2% discount, meaning the customer wouldn't be paying the full $8,450 that was the original sticker price because they paid within that 10 days period, we'd have to reduce it by 2% of that 8,450. That would be the sales discount granted from the seller, the owner in this case, to the customer, the purchaser. What would that do? It would decrease the receivable because remember, we put the receivable on the books at the full price, we would have to then reduce the receivable which would then reduce the amount of cash that we would receive from the customer. What would that also do? Decrease net income. Why? Because we've basically overstated sales when we made the sale, we put the sale on the book at 8,450, crediting sales for the entire amount. If then we grant a discount at a later point in time, we're going to have to reduce the sales by the 2% of that price. We don't reduce the sales directly, meaning the income account or revenue account. What we usually do is create another account, contra revenue account that is going to be called sales discount. It'll have a debit balance, it'll act a lot like an expense and then it always goes up in the debit direction. However, it will be reducing net income. On the income statement, it will be reducing net sales. It will be reducing basically the sales number at the top of the income statement.