Where do most companies apply the discounted dollars? Recovery to AP? Recovery to Procurement? Reduction in department cost associated with the expense?


The answer to your question depends on management's philosophy toward cost accounting. Generally, companies like to see discounts taken. A logical way to record the transaction is to reduce the expense that the discount is associated with. The reason is the fact that you would want to understand what is your true cost of buying the item which includes the discount.

To do so, you record the full amount in a G/L account, then record the offsetting discount amount in another G/L (discounts) account. That way, at year end you can see the amount and degree to which the company benefitted from discounts. (You might want to separate the early payment discount account from a loyalty discount account, if you have many and want a clear picture of amounts by type of discount.)

On the other hand some companies do record it in a separate discount account to clearly measure the value of the discounts taken vs. not taken. If the company has the financial strength and it makes economic sense to take a discount, then an analysis can be done due to isolating the discount amountto see where discounts are not being taken and find out why not.

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