 Hello in this lecture we're going to compare and contrast the sales discount and the purchase discount. Another area where we want to keep in mind what side of the transaction we are on. Something that seems obvious but can really get mixed up a lot of the time. We oftentimes mix up the sales discount and the purchase discount when we are journalizing these items. When we think about these items we want to think whether we are the person providing the discount or the person that is receiving the discount. We'll start off with the sales discount so we are the owner on the left hand side and we're making a sale to the customer on the right hand side and we're going to provide a discount on that sale. What we're imagining to happen typically what will happen is we're going to say that we have provided the inventory already we have the IOU already we've provided that inventory at full price. What we do customarily and say customer we would like the cash faster we want to improve our cash flow therefore if you give us the money within a certain amount of time period we'll give you a discount because you're paying us within that time period. If you don't pay us within that time period then we'll just want the full price which means that if the customer pays within the time period and we give the discount what will the discount do it's basically going to say that that IOU the accounts receivable that we have will go down. We put the accounts receivable on the books for the entire sales price now we're giving a discount because of this condition that happened in the future the payment being within a certain time period. That of course means that the eventual cash that we're going to get is going to be less than we had originally recorded because the accounts table is going to go down we're going to get less cash also means that net income is going to go down why well if you think about it when we recorded the sale we recorded it at the full sales price now we're going to give a discount and we're going to have to basically reduce net income in some format because of that if we think about the journal entry we're going to say that accounts receivable is going to go down in this case we're going to reduce accounts receivable when we get and we're going to get less money and then we're going to say that the sales discount is going to go up we'll talk more about that sales discount account it acts like an expense but it's more of a contra revenue account it's going to go up and that's going to bring down net income then if we think of the purchase discount again we're on the left hand side we're the owner on the left hand side now we're receiving the discount we are the person receiving the discount same thing happened here but kind of in reverse meaning that we requested the inventory in this case we've gotten the inventory and the vendor says if you pay us within a certain time period we will then give you a discount so we've put it on the books at the full price this time and then we're going to say that something happened in the future we paid within this discounted period and therefore we are going to get a discount so we're going to have to adjust our books for that discount the way to do that is that we're going to say okay the iou the amount that we owe is now going to go down because we paid within this time period they're going to give us a discount so we're not going to owe as much therefore the amount of money that we're ultimately going to pay is going to go down the place where many people get mixed up is the other side of the transaction here and that is that inventory is going to go down reason is that if you think about it we put the inventory on the books at the full price we're not going to pay the full price therefore that inventory is overstated we didn't pay that much for it we've got to reduce the amount of inventory by the discount that we got on that inventory not going on the income statement yet because we haven't yet uh recorded anything on the income statement it's going to be recorded on the income statement when we sell the inventory in the form of cost of good sold journal entry then would be accounts payable is it's going to be decreased and the inventory is then going down notice there's nothing that says sales discount in this transaction that's often where people get mixed up we've talked about the discount terms abstractly what would these discount terms look like oftentimes they're looking something like this where it says 2-10 in slash 30 or something like that what does that mean this notation means that if we get the money within the 10 day time period we will then have 2% off that will be the discount so we need to just know that that 2 represents 2% if we're paid within 10 that 10 represents 10 days if we get paid anything greater than 10 days then we're have to pay full price so remember we put it on the books at full price and we're saying if you give us the money within this discount a time period 10 days we'll give you that 2% discount otherwise we're just going to keep it on what we have recorded it at which is the full price this last part means that the payment is going to be due within 30 days so if you don't pay us within 10 days that's fine the payments due then under the normal circumstances our normal agreement which in this case happens to be 30 days and if it's not paid within 30 days then we might take collective actions like the repo man or something trying to take the inventory back or something like that but the essence of this is a 2% discount if you give it to us within the 10 day time period otherwise it's due within 30 days if you don't pay us within 30 days then you're past the payment due period