AR Cash Discount

Cash discount, when we are going to give discount to the customer, what is the accounting entry? 

Thank you for reading this post, don't forget to subscribe!

So here, when sale is made, customer account return to sales. Now when payment is received, bank account return 97,000, discount account return 3 and to customer, we give 100%. This is the accounting entry. Now SAP system provides, right, conveniently, I need not post this account manually, I can make automatic setting and I can post the discount automatically. The system generates a separate line item. First, we make the sale with payment term  0002. Client discount. Payment term, 0002. For this purpose, now I need to create a GL account. Discount account I need to create. First of all, I need to give this. So go to FS00. Discount account.

So discount is nothing but that comes under trading expenses, that is to improve your sales, I’m using trading expenses, 400202.

With template I can use because that can these are almost both same. Company code, DRLB. Let’s see. cash discount account. Change the name. That’s all. Cash discount account. Right. Now I want to get this accounting entry means manually, I’m not going to post this, I’m going to automatically generate this entry, this discount account. For that purpose, I need to make small configuration. A very small only one single step configuration I need to do so that the same entry will get it.

Financial accounting, accounts receivable and accounts payable, customer accounts, business transactions, Incoming payments, Incoming payments and global settings, Define accounts for cash discounts granted. Go here. Enter your chart of accounts. Press enter.

Now this account, that we have just now created, 400202, assign here. Transaction, SKT. SKT is nothing but account key or transaction key we call it. I repeatedly say that wherever a transaction key is there, that should be associated with 1 GL account. System will automatically post to this account that this is the key which makes the entry posted here. That is technically in the background. Whatever it will do, it will post it. So whenever automatic posting is there, there should be a transaction key. Save it. Come out. Let us post one invoice now. Post invoice with payment term 2. Don’t forget that.

So here, I’m posting, say, 1 lakh. Here, I’m taking payment term 0002. 0002 within 14 days 3%, within 30 days 2%.  But one thing I need to tell you here. What is T code? OBA4. Document, Tolerance groups, Define tolerance groups for employees. Enter company code DRLB DRAO. Here, we have given.

Authorization amount, we have given. Cash discount per line item, here, we are not given anything. 

Unless you give here, you are not authorized because I’m an accounts officer. Say for example, I’m raising an invoice and, unless some percentage is given, system will not allow me to use the payment term 0002 because if I give 0002, it’ll ask for discount. Right? See here.

Just see.” Cash discount may only be granted up to 0.000”. But here, 0002, 14, 3, 2, 45 days like that. So that’s why what I need to do is, so I cannot post an invoice unless I’m authorized here. So first of all, we need to get the authorization. Say, for example, I’m giving 5% here. 

Means up to 5%, I can give discount. You know, the screen, you are familiar with this. This (Amount per document) is amount per GL document. This (Amount per open item account item) is amount per sundry data, that is customer account or vendor account. You should have this amount here, authorization amount. This (Cash discount per line item) is all your authorization for the purpose of granting any discount. These 3 should be there in order to post the entries. Come back. 

Now raise the invoice. Now system will allow you to post.

Message “Terms of payment changed; Check.” Just only it is cautioning us, nothing more than that. Press enter.

1 lakh. Cash discount granted to customer. Save it. 

We get a message stating Document date (1800013) was posted in company code DRLB

Let me post one more entry with reference, I’m using our techniques that have that we have used in case of GL. Right. Same amount with same everything’s here. I’m creating one more invoice, second invoice.

So come back to menu. Now let us suppose that we are receiving the payment from customer.

 See here. Here, I can see 2 scenarios. One is customer knows that he is eligible for a discount, and in such case, what he will do? He’ll pay only 97,000, because if he is making payment before 14 days, definitely he’ll pay 97,000 because he knows that he’s going to get cash discount. 

200405, my bank account. So what is the accounting entry I’m posting here? Only bank account return to customer. Then system will generate the 3rd line item. Amount, say for example, I’m giving 97,000, I’ve received only 97,000. Click Process open items.

See? For these 2 invoices, system has already identified 3, 3. So what I need to do here, is deactivate all. 

Right. See this is in active mode and see 97, 97. Now I can save it.

Say for example, if my payment received 20th. 14 days means up to October 14th. So October, 4th. Say I’m taking October 4th, that is 04/10/2013.

 Just want to check whether system is going to future. 

Right. Nothing wrong.

See? Even if you post the entry on 14th, the 4th, system still is allowing 3% cash discount. Now what I will do, I am going to deactivate all others. I can make one more setting also. 

See, all are in active mode.

In this mode. So in case we have so many, deactivating each and every line item is a difficult job. 

See items, so we select the respective items button. 

I’m linking up to 13th invoice. So 3,000, 3,000, 97,000. Now let me check what is the entry system is going to give us. Because invoice amount is 1 lakh, payment received is 97,000, then that is this difference of 3,000 rupees should go to our discount account. Go to document, simulate.

See,  System has automatically generated this line item. Cash discount how? I have not given that because we have an automatic setting we have done here. So here, automatic setting whatever we have done because of that, system is able to give you this line item. Now I can save it.

Now similarly, I want to, say for example, second invoice I’m taking. 

Second invoice say, if I’m going to post the say amount 97. Second invoice also I’m taking 97, but I’m not going to post it. I just want to show you how it works.

Right? Here it is showing 3% cash discount. I’ll deactivate and I can do that. Right? 97,000, it will post. But now what I’m doing is I want to change the date. Date to after 14 days means, say, 5th October or 3 days grace period also I think it may consider. Let me check. 5/9 already we have seen, it is giving 3% cash discount. That’s why what I will do is I’ll take 10/10.

Right. If it is 10/10, then what is the payment that we receive from the customer? System will consider only 2% discount. So that’s why what I will do, I’ll take 98,000 because customer already knows that he’s going to get 2% discount. Process open item. Period 6 adjusted in line with the posting date, Check document date in future. Nothing wrong. 

See here, system identified 2% cash discount because the payment term, and if you post it after 30 days, you’ll not get any discount at all. Now in case, if I’m going to post this see. Deactivate, then Simulate.

You’ll get 2% cash discount. Now I will do one more, I’m not saving this. If I’m going to take not 10/10, so I’m taking 25th October, that is more than 30 days. 

So here, what I will do, I’m not going to give any discount because customer knows that he is not going to get any discount.

See? No discount. Because after the due date, system will not add infinite discount.

I will do one more thing. One more small, setting I’ll do. Here, say for example, we are receiving the payment within 14 days, and customer by mistake or he doesn’t know that he’s going to get the cash discount. Sales officer did not inform him. Unknowingly, he has paid 1 lakh.

Total 1 lakh he has paid. Payment is made within 14 days. He is eligible for discount, that means he is paying extra 3. What system will do now? Click on Process open items. 

See. System is identifying it, but payment received is 1 lakh. Let us see what is going to happen. Deactivate.

See here, payment received is 1 lakh and amount assigned is 97,000. Because he’s eligible for 30% discount, system will consider automatically. Now if I try to save, system say “the difference is too large for clearing”, and it will not allow you to clear the open item. That’s what I need to do, each of 97,000 that fellow paid, 1 lakh, that is 3,000 extra he has paid. So what I will do, that 3,000, I’ll adjust it as a partial payment from this invoice, nothing wrong. I’m going to adjust 3,000 extra whatever that fellow has paid as partial payment. Double click on this as in the image below. 

Go to partial payment tab. System identified 1 lakh 33,000. Just you double click it. Keep the cursor there, double click. 

See? System picked up 3,000. Now amount entered, amount assigned are equal. Now see what is the accounting entry, this is something peculiar. Go to document, simulate. You’ll get some confusion here. 

Here, see bank account return 1 lakh. Anyhow, we have received 1 lakh that’s why 1 lakh has been debited here. Two, I have 40 cash discount, 3,000. That is also correct. And Sun Pharma has been given 1 lakh credit. Now this 3,000 is extra line item. Click on it. 

What is this? Whatever the discount that customer has paid to us, so that is credited to his account against another invoice. That’s why here system identifies Sun Pharma extra credit of 3,000, it will show you a separate line item. I can save it. Document, 1400008, it was posted in company code DRLB. So afterwards, what I can do, See the open items?

8 lakh 30,000 is the outstanding amount. 3,000 is  just now extra amount, whatever we have received. And this 10,000 is some quantity rebate.

So what I can do now, customer told us anyway, I have paid 3,000 subsequently, he came to know that 3,000 he has paid extra is 3,000, 10,000, 13,000. Right? You are just I’m paying balance 1 lakh 20,000. Now 1 lakh 20 plus 10 is 1 lakh 30, plus 3, 1 lakh 33. With all these things, he wanted me to clear this open item. I mean, he doesn’t know that clearing the open item, etc, Customer says that in one invoice, already 3,000 extra paid and 10,000, I I got the cash rebate. Right? This is quantity rebate and balance 1 lakh 20,000, I’m setting the payment. So we have received that. I want to clear this open item (document no 1800007) with the 3,000 and the 10,000 plus 1 lakh 20, whatever I’m going to receive. Go to Incoming payment. 

See, 1 lakh 20 we have received. Process open items. 

What should I do now? First, I deactivate all other invoices. See 120 is there, 1 lakh 22. 1 lakh 33. This is the invoice to which we are going to link up, that’s why keep that in active mode. This discount (3,000), keep it in active active mode. 1 lakh 40, 1 lakh 44. 10,000 also I’m going to link to 1 lakh 33,000. 

So see 120, 120. Right. Save it. Then go to Document, click display

Bank account data, Sun Pharma. See here at FBL5N. 

Right. 133,000, 3000, 10,000, everything is gone. From Line Item selection , I’ll remove the tick from cleared items, I’ll say all items. 

See? 133, 3000, 10,000. Yeah. This is the one. So 10 +3+120, all these things put together, we have cleared this invoice. So this is the case of cash discounts granted to customer.