 Hello, in this lecture, we're going to record the journal entry related to a sales discount. So we have our owner here, the owner is going to provide a sales discount to the customer. First thing we want to do with this transaction is look at the original transaction. That would be that in this case, we have our owner selling inventory in this case Inc. to the customer. The customer has not yet paid for it. They're going to pay with an IOU. Sales price being $8,450. We'll also see, we'll often see in the terms of a problem like this, terms of two slash 10 and slash 30. We saw last time what that means. This notation means in this case, we have a 2% discount. If the customer pays within 10 days, otherwise we want to receive it within 30 days. When we first put the recording of the journal entry on the books, this doesn't have an impact on that original journal entry, meaning we're going to put it on the books for the full $8,450. Then if the customer does pay within 10 days, we will account for the discount at that time period. Therefore, the original journal entry will look something like this. We'll have two parts to it. The journal entry will include the sales side where accounts receivable is going to go up. We have the IOU from the customer of the full $8,450 and we have the sales going up. We have the cost of goods sold side, which means that we have inventory going down and the cost of goods sold going up. That means that we recorded sales at the full price, $8,450, and we record the receivable at $8,450. It's possible for the customer to pay less than that if the condition happens in the future that the payment is received within 10 days. If we think about what would happen if the customer then paid within the 10 days, that means that the owner will give the discount. The owner will provide the discount. The impact of the discount would be that the IOU would then go down. The owner would not owe the entire sales price of the $8,450 that is on our books as a receivable and therefore the amount of cash that we would ultimately receive as the owner would be less than the original receivable of $8,450. Also net income will go down. Let's take a look at the journal entry and see why. First we're going to calculate the actual discount. We can do this a couple different ways. I'm going to do it the long way. The way most people tend to calculate it and then have a shortcut way that might be a little bit quicker. This is important to know. It's really useful because this is the same way we can calculate a discount if we're just going to a store and calculating a sale, meaning that if we have a 2 slash 10 and 32% discount if we pay within 10 days, therefore what would the amount of cash we would receive in this case if there was payment within that 10 day period? Well, we got the original sales price of $8,450. If we multiply that times 2%, we then have the discount amount of $169. That would be the discount. Therefore how much would we receive? Well, we have the sales price of $8,450 minus the discount that we calculated to be $169 means that we would get cash of $8,281. Original sales price, the money that we will actually receive after the discount. We can do that a lot quicker if we do a calculation such as sales price and then we recognize well if we're not going to get 2% of the money, how much money are we going to get? 100% minus the 2% or 98%. So if we just take that sales price minus one minus the discount or 98% or 100% minus the 2%, we would then get the same $8,281. That's how much cash we are actually going to get. Knowing that, let's make the journal entry here. So here's our journal entry. It's going to be posted upper left hand side. We'll record that to our trial balance on the right. First we know that we're going to get cash. This is a normal transaction where we got paid. Just one more factor in that we're going to have to account for that discount at this time because we got paid within the 10 day period. So cash is received, we got $8,281. We got to calculate that with the calculation we did prior. If we then post that out, then cash is going to be debited, increasing cash from $13,500 by the $8,281 to $121,781. If we get paid with cash, the credit usually goes to accounts receivable. However, it's not going to be credited for the amount of cash we got $8,281 because it's on the books for $8,450. Therefore we got to take the entire $8,450 down, decreasing accounts receivable by the entire amount that is on the books. If we do not, if we just decreased it by the $8,281, then we'll have the amount of the discount represented as still being owed and it won't be owed. It shouldn't be owed. It needs to be down, in this case, $2,0, bringing that entire amount down to $0, the entire amount off the books. So if we post that out, then we're going to say the accounts receivable is going to go down by the $8,450. It's a debit balance. We're going to credit it, making it go down to $0. But of course the debits do not equal the credits at this point. We need the plug and what is that plug going to be? The discount that we calculated, which was the $8,450 times the 2%, or we can take the difference between the debits and the credits to plug to get this $169. We're going to put that to the sales discount. Now this is a new account that we haven't seen in the service companies. Why do we have it there? You might think that we should be reducing sales. Why? Because we overstated sales. When we put the sale on the books, we recorded it at the full price of $8,450 and we're not getting that much. We're not getting $8,281. We didn't really sell it for $8,450. Why don't we reduce sales with that debit? Reason being, we almost never reduce sales. If sales only goes up, we're going to make another account that acts like an expense in that it's going to be debited. It always goes up in the debit direction, but it's really a contra sales account. Really what we're saying is that sales is going to be decreased pretty much by the discount. When we put it on the income statement, it's going to be in the sales section. It's going to act like an expense. However, in that we are debiting it, increasing it in the debit direction, which will bring down net income impact on the financials on the account equation. Assets have gone up by the cash and assets have gone down by the accounts receivable. However, we have another activity that's happening as well, not the liabilities, which are staying the same, but the equity is also going down by that discount of $169. Therefore, if we look at net income, it went down by that discount, meaning it was at the 108, 450 minus the 6005, the 101, 950, and now we took it down by that 169, the amount of the discount. That brings it down to 101, 781, which is this 108, 450 minus the 169 minus the 6500. That is net income, not a loss.