 In this presentation, we will be recording transactions for both a sales discount and purchase discount comparing and contrasting the two. Our information will be on the left side. We'll be entering that into our general journal and then we'll be posting that not to the general ledger but to a worksheet. Worksheet will give us a quick view of the activity perfect for just a few transactions giving us both the beginning balance, the activity and then the ending balance. Within our general journal, we will have both debit and credit column. Credits also represented with bracketed or negative numbers. Within our trial balance, however, we will have the debits and credits represented by debits having no brackets or positive numbers, credits having brackets or negative numbers to decrease the complexity of the worksheet and have less columns. And then it will also help with the formulas notes down here that we see we are in balance by the green zeros representing that the debits minus the credits equals zero and therefore the debits equal the credits. We're going to then enter our information into the entries and get to our ending balance. We currently have assets in green. We've got the liabilities in orange, the equity and light blue income accounts of revenue and expenses in the dark blue. We have our net income calculated here, so it's going to be the 107 minus the 5000 giving us that 102. First transaction says received cash. And then we have cash discount on sale term to two slash 10 in slash 30. So the concept here is what we're trying to say is we are receiving cash. We're receiving cash not because we made a sale at this point in time, but because we made a sale in the past in accordance with these terms and now we're getting paid for it. So if we break this down, the idea is that we had a sale and now we're getting paid and we got to figure out what these terms mean, that terms mean two slash 10 in slash 30. That's a 2% discount if we're paid within 10 days. Otherwise, the normal pay period is 30 days. We get paid outside of 30 days. We could take collective action at that time. So those are going to be the terms. Now we're going to assume here that we are getting paid within the discount period. So whenever we see something like this, we could start to construct the journal entry just from scratch here and say, okay, we got money, is cash affected? Yeah, we received cash and then we can think of the rest of the journal entry. But it might help to actually record this journal entry, what the actual sale was first just to write that down and basically a worksheet and then think of what we would have to do if we received the payment within the discount period. So when we actually made the sale, what must have happened? We got to be able to visualize, think back and see this, especially if we're working in smaller questions like multiple choice questions. If we made a sale on account, we didn't get cash. We got instead accounts receivable. So we'll first record the accounts receivable in our worksheet. So this isn't the journal entry we're doing here. This is going to be what happened prior. So we're going to copy the accounts receivable and I put it down here in our worksheet in sale G19, right click and paste 123. It's a debit balance account. We're going to say it went up when we made the sale because people owe us more money. We're going to do the same thing to it as its normal balance, which is a debit. So we're going to put it on the books for, we would have put it on the books for the full amount to 2800 not net of the discount at the point of time that we record it. That's going to be the format in which we record this. So we're going to say it's 2800. We're going to credit something. I'm going to represent that with a negative and then point to the sale taking that number and flipping the sign. So there's the credit. Now we just need to know what that account would be. And of course we made a sale, it would have been sales or revenue. So here's the revenue portion of it. So it's a credit balance. We know that we're going to credit it because we debited the receivable. Also know we're going to credit it because it's a credit balance account. And therefore goes up in the credit direction, revenue always going up. So we're going to copy this and scroll down to our worksheet. Right click and paste 123. We could indent if we would like. So we're going to go to the home tab, alignment and increase indenting. Can also do that by double clicking and selecting the space bar. So that's going to be our journal entry. Now we're not going to record the cost of good sold portion of it because this is really what we are concerned with this piece here. Now what's going to happen when we get payment typically is that we're going to get the cash now, meaning we receive the cash for the receivable. And then we would record the receivable that would be going down once we got the cash. So we can start to construct this now. We're going to say we got cash. I'm going to copy the cash. It has a debit balance. We're going to make it to go up by doing the same thing to it, which is another debit. So I'm going to copy the cash, right click and copy. Put that in cell C5, right click and paste 123. Now the problem is that we're not going to get 2500 if we receive the cash within the discount period. How much would we get? We would get something less than that, of course. If we wanted to calculate that, we could think about our worksheet down here. And just to get an idea of this discount, it's useful to know how to do this a couple of different ways. If we were going to get an original amount of 2800 and then we had a discount of, we're saying 2%, I note that 2% if we had a decimal is 0.02. 0.02 would be 2%. So that's 0.02. And if we made it a percentage in Excel, we can go to the home tab and make it a percent numbers group and make it a percent. It'll make the decimal go over two places and add a percentage time. If we multiply that out, then we're going to say this equals 82008 times 2%. And that's going to give us 56. That's the discount. This is the discount rate. And this is the discount. But then how much cash are we going to get? The cash we're going to get is going to be equal to this original 2800 minus the 56 discount. Now it's useful to note also that we could do that at one step. And if you're thinking about a sale or something like that, if you go to the store and there's a sale, we might want to do this a bit faster in the calculation. We could say if the original was 2800, we're going to say that instead of the discount rate, we're going to have the rate that we're going to pay. This is the discount rate versus rate pay. And that's going to be equal to 1 or 100% minus 2% or .02. I'm going to add some decimals, go into the home tab, alignment, add decimals. So in other words, if we're going to not pay 2%, we are going to pay 100% minus 2% or 98%. This would be in decimal format. If we want to make it in percentage format, we can go to the home tab, numbers group, and make it a percent. And then we can just skip right down here to cash and say we're going to say equals 2008 times to 98%. And that's how much cash we're going to pay. So this little quicker way of doing it's pretty useful because any kind of sale or anything, of course, that's a calculation you can do it be a bit quicker to see how much you would pay. So we're going to say that one more time here. We're going to say the cash we're going to get is equal to 2800 times and we could say 1 minus the discount .02 and that'll give us our 2744. Then the credit would typically go to accounts receivable. So I'm going to say that's going to be true. So I'm going to copy that, accounts receivable. I'm going to skip a line though because there's going to be this discount problem here. There's going to be two transactions. There's going to be one more. So I'm going to put it down here in C7, right click and paste 123. Now the problem is we can't make it go down by 2744 for accounts receivable. If we did so, then we'd be left with the difference, the discount showing on our books as still being owed by the customer. So when we record the receivable, we need to take the entire thing off the books. For 2800, 2800, 2800 needs to go off the books for 2800 if we're representing receivable going down to the point where this customer no longer owes us money as they do not because we gave them a discount. Okay. So that's going to be the other side of it. Now we have this difference here. The debits and credits not being the same. We can calculate this discount by just saying, you know, if we add up the debits and credits and say 2800 is the credit, minus 2744 is the debit. There's the 56, which of course is also the discount or 2800 times 2%. So there's a few different ways we can get to this, this number. We can, we can construct this journal tree a few different ways. Typically I would think of cash first and then the receivable. And then this account, which in this case, what account would that be? We got to find it. We know we need the 56 in order to be in balance in order for these two debits, 2800 to equal that credit, 2800. What should it be? We're going to say it goes to this account here, sales discount. Sales discount. Note where it is. It's going to be on the income statement. It's a contra sales account. In other words, it acts kind of like a expense in that it has a debit balance goes up in the debit direction, bringing down net income. However, it's really a contra sales account, meaning what happened here is we obviously increased sales when we made this journal entry by too much. We increased sales by 2800. We're not going to get 2800. We overstated sales by $56. So you would think that we would decrease it with this debit by the 56. But once again, we never really decrease revenue. Revenue only goes up. We're going to make some exception or work around to, rather than decreasing this with a debit, put that debit to a contra account, that account of sales discount. So this is going to be the account sales discount. I'm going to copy that right click and copy. We're going to put that in C6, right click and paste 123. There's our journal entry. If we highlight the entire thing, the debits minus the credits equal zero. We are in balance. We're going to make the credits indent a bit, go into the home tab, alignment, increase indent. You can also do that with the space bar three times. That's going to be our first transaction. Let's post it, see what happens. Here's our cash up top. Here's our cash on the trial balance. We're going to post that to sell I5, I5. So within I5, I'm going to select equals, point to that to 2744. This debit will go up in the debit direction from 7107800 by 2744 to 110544. Then we have the discount. Here's the discount on our journal entry. Here it is on the trial balance. We're going to be in our center column in cell I12. I12, we will say equals, point to that to 56, bringing the balance up from zero by 56 to 56. Also bringing down net income. So that will decrease net income. And that's important. That could be multiple choice questions that will often ask something like that. And then we're going to say the accounts receivable is here, accounts receivable is here. We're going to be in I6. We are in I6 and we will say equals and point to that 2800. The accounts receivable of 10200 will be going down by 2800 to 7400. So it's going to be our first journal entry. I'm going to reset our worksheet. So we have our worksheet for the second component here. I'm going to reformat this cells, these two percentage. I want these gone by highlighting this cells above it, going to the home tab and hitting this paint brush, which is just going to copy the formatting of it. And then we'll just click down here and it'll take the decimals away and the percentage. And then I'm just going to delete this whole thing and see if cleared worksheet for our next problem. So the next one says pay cash, purchase discount on sale terms to 10 and 30. So these two, I'm putting these on the same sheet because they look very similar, but they're slightly different. Of course, this up here is the discount that we give to our customer. And this down here is a discount given to us by our vendor. So in this case, if we think about this, we might want to think first about what happened in the past. What's the prior transaction that set up the fact that we are now paying? What happened in the past is we made a purchase. I'm going to assume that we purchased merchandise. Merchandise must have gone up. Therefore, it has a debit balance here, must have gone up with a debit. So I'm going to copy this, put it down here in our worksheet. This is what happened in the past before and what we need to know about when we record this transaction, right click and paste one, two, three, it was for seven thousand. We then credit something seven thousand. I'm going to do that with a negative and point to that number. And the credit's not going to be cash. Cash isn't going to be paid for this. Instead, it's going to be the accounts payable. So the bad thing went up. The liability went up. So we'll copy accounts payable, copy accounts payable. We're going to put that in G20 and right click, paste one, two, three. So there's our journal entry that sets up basically this transaction. Then of course, what happens is we pay the cash. We're paying off the accounts payable. Now, normally that would be pretty straightforward and easy to think about. However, we have this discount and it looks very similar up here. We have the same terms, but these are the terms given to us by the vendor rather than the terms we give to our customer. So we have the terms to 10 in 30, given to us. And we're going to say that we paid it within the 10 days. So same kind of problem, same kind of idea. And we're going to say, okay, well cash is affected. Yeah, cash is affected. We paid cash. So I'm going to copy that. I'm going to skip a line for a new journal entry and skip another line because we need to credit the cash. Cash has a debit balance. We paid it. It needs to go down. We're going to do the opposite thing to it. A credit. So in C10, I'm in cell C10. Going to right click and paste one, two, three. Then in this, the payment here, again, we don't know. We have to calculate basically what did we pay. Same type of calculation, of course. I'm going to do that. I'll do that in one step. We'll do it up here. It's just going to be equals. Well, let's think about it one more time. We'll be in our worksheet. We're going to say we had the 7,000. The discount rate is going to be 0.02. So 0.02 is 2% because this means 2% if we pay in 10 days. Otherwise, we pay in 30 days. We're going to say we paid in 10 days. So if I want to see the decimals, home tab, numbers, increased decimals. If we want to make it a percent, we make it a percent moving the decimal two places over, adding a percentage just by clicking that there. Then we can multiply that out in cell H24 equals 7,000 times the 2% equals H22 times H23 7,000 times 2% times 0.02 equals 140. That is the discount, not how much we paid. So then we paid 7,000 minus 140 equals this cell 7,000 H22 minus this cell 140. Once again, we could do that with one step by saying not the rate that we didn't pay, but the rate we did pay, which is equal to 1 or 100% minus 0.02, 2%. That gives us something that we can't see because we don't have decimals until we go to the home tab. Numbers group, increased decimals, 98%. If we didn't pay 2%, we paid 98%. If we want to make that a percentage, we select the percentage item moving the decimal two places and adding a percentage. So then we can go straight down. We can go from the 7,000 down up here down to how much we paid directly by saying this is equivalent to the 7,000 and I 22 times the 98 and I 23 giving us 6,860. So that's how much we paid. We want that in the credit side here. So I'm going to do that same calculation starting not with an equals, but with a negative so that we end up with a negative number that 7,000 times 0.98. That gives us the 6,860, 6,860. I'm going to increase the indenting home tab alignment increase indenting. There is that the second component when we pay cash will typically be for the accounts payable. We already bought the merchandise. We're going to be debiting the merchandise or increasing the merchandise. Instead, we're going to be decreasing the liability liability has a credit balance. We're going to do the opposite thing to it here, which will be a debit. So we're going to copy the accounts payable right click and copy putting that in top on top and so C9 right click and paste 123. Now, the tricky thing once again here is that the debit will not be for the cash that was paid of 6,860. If we did so, we would still have on our books an indication that we owe the difference between what we paid and what we originally put in accounts payable, which would be equal to the discount of 140. We don't owe that anymore because we paid within the discount period and therefore got to pay less. And therefore it needs to come off the books for the entire amount even though we did not pay the entire amount 7,000. So there's the 7,000 then of course we're not in balance. The difference this minus this is the discount amount of 140. So we can put that here we need a credit of 140 in order for the debits to equal the credits. I'm going to use that with our some type formulas is called like the plug formula I call it. And we're going to say instead of equals, I'm going to say negative and then SUM the sum function. And we're going to sum up double click in the sum. We're going to sum up these four cells. So whatever's in those four cells, which is the 7,000 debit and the 6,860 credit enter will give us a credit. It'll add that up, which would have been if we highlight this 140 and it'll flip the sign for a negative 140. We could of course also have calculated it as 7,000 minus the 2% to give us the 140, which is the discount amount. Now, what most students almost all students when they're first learning this and get wrong is that we're going to say, OK, well, what should this be? And if you look at a trial balance, you're going to say, well, I'm looking for something with a discount in it because I got a discount. And you're going to pick up sales discount. But note the sales discount represents a discount we give to the customers. It's a contra sales account representing a sales discount that we give for our sales. And this is a purchase discount. So you would think, OK, well, where's the purchase discount area that we need to be put in the discount to? Possibly it would be a contra expense account. But what's really happening here is we're assuming we didn't sell the inventory yet at this point in time or it's going to be an effect on the inventory. What really happened if we look over here, we said we paid for the inventory $7,000. We didn't pay $7,000. We only paid at the end of the day $6,860. The difference then of 140 is what we overstated inventory by. And so the most confusing thing about the purchase discount, especially when we do it in conjunction at the same time as when we're learning the sales discount, is that the actual discount amount, in this case the 140 doesn't go to any account with the term discount in it. It decreases the merchandise inventory because we had overstated it when we originally purchased it. So it's at a debit balance. We're going to make it go down by the credit of 140. So we're going to copy the merchandise inventory. We're going to put that in sales C11, right click and paste 123. Going to increase the indenting home tab alignment increase indenting. So there's going to be our transaction. We're going to post this now. So here's our accounts payable. Here's our accounts payable on the trial balance. We're going to post it to I eight. So we are in I eight. We will say equals and point to that $7,000. This is a credit. That's a debit. Those are opposites bringing the amount of $13,500 credit down by $7,000 to $6,500. Next, we're going to post the cash. So here's the cash on the journal entry. Here's the cash on the trial balance. We want to be here in I five. I five. Something's in it. We then will double click on it. Go to the end of it. Say plus and then point to that cash amount that $6,860, which will bring this debit balance of $110,540 down by $6,862,103,684. Then we got the merchandise inventory. Here's the merchandise inventory. Here it is on the trial balance. We are in so I seven within I seven. We're going to say equals point to that 140 and that $27,000. It's going to go down by the credit of $142,268,60. That'll put us back in balance. Note that the second transaction doesn't affect the income statement at all. None of these accounts are income statement accounts. Whereas the first transaction does affect the income statement. The first transaction is reversing. In essence, part of the sale we made second transaction is reversing. In essence, part of the inventory we purchased part of the asset that we purchased, which we had not sold yet has not yet. Or we're assuming it hasn't been sold yet. It hasn't gone into at this point cost of goods sold, which is when it would hit the income statement at the point of sale.