Final answer:
The two methods used for recording sales discounts are the gross method, which records sales at the total invoice amount, and the net method, which records sales assuming discounts are taken. The choice between both methods affects financial statements and company performance perception.
Step-by-step explanation:
The two methods used for recording sales discounts are the gross method and the net method. Sales discounts are reductions granted by a seller to encourage early payment by a buyer and are common in business transactions. They are recorded in accounting to reflect the actual sales revenue that will be realized after accounting for the discount offered.
The gross method records the sale without the discount. The discount, if used by the buyer, is recorded when the payment is received within the discount period. It's important to note that under the gross method, sales revenue initially appears higher because it is recorded at the total invoice amount.
Conversely, the net method assumes that the buyer will take advantage of the discount and immediately records the sale at the discounted price. If the buyer does not take the discount, the difference is recorded as sales discount forfeited, which is treated as a type of revenue. The net method can provide a more conservative view of revenues, initially reporting lower sales revenue and potentially recognizing additional revenue if the discount is not taken.
These methodologies may conveniently align with a company's financial reporting policies and can serve as rough guidelines for presenting financial positions. While neither method is universally 'right,' companies often select one based on the nature of their sales transactions and their financial accounting strategies. It is worth noting that the choice between gross and net methods can impact the financial statements and may affect the perception of the company's performance.