Discount – definition
A discount is otherwise known as a conditional rebate that a business can give to a counterparty in exchange for early repayment of an obligation. This discount can be freely given on the basis of arrangements between the entities involved in a domestic or foreign transaction.
What is an invoice discount?
According to the letter of the law (Art. 106e para. 1 pt. 10 of the Law on Value Added Tax) the purchase/sale invoice should contain information on all discounts granted, their amount and the conditions under which they are granted.
EXAMPLE
The company issues a sales invoice for the net amount of PLN 7,000. VAT will then amount to PLN 1610, and the gross value of the invoice will be PLN 8610. By virtue of the agreement with the contractor, the entrepreneur decides to give a discount of 3.5%.
In the situation described above, the invoice should include the value of the amount due without taking into account the discount, i.e. 8610 PLN gross. A properly completed document should also describe the details of the discount.
Satisfy the procedures by writing a discount on the invoice, that is, a note containing the following data:
- the payment term in which the discount is given (for example, 7 days);
- the amount of the discount (in our example, 3.5%);
- the amount due less the discount (8610 PLN – 301.35 PLN = 8308.65 PLN gross).
If the condition included in the sales document is fulfilled (in this case, a repayment term of no more than 7 days), the entity that previously issued the sales invoice is obliged to issue a correction invoice containing the amount after taking into account the discount granted to the buyer.
An adjustment invoice after a discount is granted is not necessary in only one situation: if the discount is granted no later than when the sales invoice is issued, that is, if the counterparty has paid before the seller has even issued the document. In practice, this is an extremely rare situation.
Of course, if the condition has not been met and the predetermined repayment date has passed, the contractor must pay the full amount of the invoice, and the seller does not make any changes to the original document.
Discount vs. VAT
Although the institution of a discount is simple in its assumptions, doubts often arise at the moment when a transaction carried out with a discount should be accounted for. In particular, it is problematic to determine the precise moment when the discount is granted – will it be the moment of issuance of the first invoice (containing the discount condition), or perhaps the date of fulfillment of the condition (i.e., making an early repayment)?
The latter option is more often taken as the safer option, but even in this case it should be taken into account that the date may fall in the next accounting period. In such a situation, settle the transaction with a discount in the correct accounting period.
EXAMPLE
The aforementioned transaction for the gross amount of PLN 8610 took place at the end of March, and the invoice was issued on the 28th. day of that month. Meeting the discount condition, the contractor transferred funds to the seller’s account on April 3.
In the above arrangement, at the time of filing the VAT-7 return, the entrepreneur will show the value of the transaction minus the discount given to the contractor. But what if, on the day of the declaration, it is not known whether the conditions will be met?
In some industries, customary repayment terms are not 14 or 28, but even 120 days. In such a situation, the company may decide to give a discount, for example, when repaying before 60 days. If it settles VAT on a monthly basis, it is unable to determine whether the condition for the discount has been met at the time of filing the return.
The situation described requires the declaration of the full amount due. When the payment appears in the seller’s account, he will have to make a correction to the previously filed return.
How to account for a discount?
The issue of accounting for the discount is also often in doubt – some wording in the regulations suggested that entrepreneurs should include the discount under other operating income. However, this is not true – the discount received is equated with a discount, which means that it reduces the purchase price of goods or services. The amount of the discount will therefore affect income tax and VAT amounts, but it should not be accounted for as other operating income.
Summary
Accounting for a discount is not a difficult thing to do, and just giving one can be a good way to improve the flow of funds between your company and your contractor. The win-win model works flawlessly, and the not-overly-complicated process encourages you to try this element in cooperation with buyers of your company’s goods.
