Final answer:
The net method records sales at the net amount after discount, assuming it will be taken, while the gross method records sales at the full amount, with discounts recorded when they are actually taken. The choice between these methods affects how sales revenue and expenses are reported in financial statements.
Step-by-step explanation:
When it comes to handling sales discounts, there are two primary methods used by businesses: the net method and the gross method. The net method involves recording the sale and related receivable at the net amount, assuming the discount will be taken. Under this method, if the customer pays within the discount period, the payment received is exactly the amount recorded. If the discount is not taken, the difference is recorded as discount lost, which is an expense. On the other hand, the gross method records the sale at the total invoice amount, without assuming that discounts will be taken. If a customer takes advantage of the discount, the difference is recorded as sales discount, which reduces the total sales revenue.
For example, if a company sells goods for $1,000 with terms of 2/10, n/30 (2% discount if paid within 10 days, otherwise the full amount is due in 30 days), under the net method, the sale would be recorded as $980. If the discount is not taken, then the additional $20 is considered an expense. Using the gross method, the sale would be initially recorded as $1,000, and if the discount is taken, the sales revenue would be reduced by $20 due to the discount.