Cash discount represents the discount that will be applied to the customer payment, if the payment is made before the due date. This encourages the customer to pay before the due date. Cash discount has the flexibility to assign the next cash discount, which could be a deal with the customer. In order to create the cash discount record, navigate to Accounts receivable | Payments setup | Cash discounts.
As shown in the following screenshot, which represents the Cash discounts form, the Setup fast tab identifies the discount percentage, number of months, and number of days. It is important to assign the main account for customer discounts:
Assume that an invoice has been posted on January 1, the cash discount is 4% if the invoice is paid within 10 days, and the terms of payment are net 20 days. The invoice amount is 1,000 USD. The sales tax is 6%, which becomes equal to 60 USD (invoice amount * sales tax) (1000 * 6%).
The total invoice amount is 1,060 USD (invoice amount + sales tax) (1000 + 60).
The cash discount is 4% of the invoice amount "before sales tax", 40 USD is the discount amount, which is calculated based on the invoice amount which is 1,000 USD, and note that the invoice amount excludes the sales tax (invoice amount * cash discount) (1000 * 4%).
The invoice amount after the cash discount is 960 USD (invoice amount – cash discount amount) (1,000 – 40).
The total invoice amount to be paid is 1,020 USD (invoice amount after cash discount + sales tax amount) (960 + 60).
The cash discount date of the customer free text invoice is January 11, and its amount is –40.
We then go to the Customer payments form by navigating to Accounts receivable | Payments | Payment journal and create journal, then move to its lines, select customer ID in account field and settle it against the posted invoice on January 1. As shown in this screenshot, the payment amount is 1,020.00:
In the following screenshot, the changed payment date, January 19, is visible and the cash discount goes to the next cash discount code. It is 2% within 30 days:
