Which of the following statements regarding sales discounts is true?

• A. Sales discounts are recorded as a reduction of gross sales revenue on the income statement.
• B. Sales discounts are recognized only when payment is received after the discount period.
• C. Sales discounts are classified as an operating expense.
• D. Sales discounts increase the reported amount of accounts receivable.

Answer: (A)

Verified step by step guidance

1. Understand the concept of sales discounts: Sales discounts are reductions in the amount owed by a customer if they pay within a specified period, often referred to as the discount period. These discounts are offered to encourage prompt payment.
2. Identify how sales discounts are recorded: Sales discounts are not classified as operating expenses. Instead, they are recorded as a reduction of gross sales revenue on the income statement, which reflects the net sales amount.
3. Clarify the timing of recognition: Sales discounts are recognized only when the customer makes the payment within the discount period. If payment is made after the discount period, no discount is applied or recognized.
4. Analyze the impact on accounts receivable: Sales discounts do not increase the reported amount of accounts receivable. Instead, they reduce the amount of cash expected to be collected if the customer takes advantage of the discount.
5. Conclude the correct statement: Based on the analysis, the correct statement is that sales discounts are recorded as a reduction of gross sales revenue on the income statement.