What is the effect of a sales discount on the seller's books?

• A. Debit Cash for net amount; Debit Sales Discounts for the discount; Credit Accounts Receivable for full amount.
• B. Debit Accounts Receivable; Credit Cash; Credit Sales for the discount.
• C. Debit Sales Revenue; Credit Cash for the discount; Debit Cost of Goods Sold.
• D. Debit Sales Discounts for the discount; Debit Cash for the full amount; Credit Accounts Receivable for the net amount.

Answer: (A)

When a seller offers a sales discount and the customer pays within the discount period, the cash received is the net amount, and the discount is recorded as a debit to a contra-revenue account to show lower revenue. The standard entry is: Debit Cash for the net amount actually received; Debit Sales Discounts for the discount amount; Credit Accounts Receivable for the full amount originally billed. This fulfills two things at once: it removes the receivable for the full billed amount, and it reduces revenue by the amount of the discount through the contra-revenue account, so total net revenue reflects the discount. The cash balance increases by what the customer pays, while the Accounts Receivable balance decreases by the gross amount billed, keeping the books balanced.

This aligns with the correct approach because you’re not debiting Accounts Receivable when cash is collected; you’re debiting Cash and the discount as a contra-revenue, and you’re crediting Accounts Receivable for the full amount. Other options misstate which accounts are debited or credited or the direction of the entries, leading to an incorrect reflection of cash, receivables, and revenue.