BTerrell Group Blog

Accounting Guidance for Discounts

Posted by Brian Terrell on Mon, Jul 18, 2016

In order to maintain a loyal client base and attract new clients, discounts are a go-to Discount.jpgeffort for most companies. When promising discounts to clients on future purchases of products or services, there are a few guidelines to follow. As discussed in “Accounting for Significant Incremental Discounts on Future Purchases,” posted on, the specific guidance for offering discounts for future purchases is defined in Accounting Standards Codification (ASC) 985-605, Sections 55-82 through 55-85. While this method is mostly used in the software industry, it can also be applied to other industries.

The guidance suggests that the vendor and customer should define the terms of this discounted arrangement in a contract. Future purchases can be discounted or incremental based on the arrangement, which is also based on the fair value of each element. The vendor needs to know the maximum allowable future discount, the specific product or services that can be subject to discount, and the fair value of that item or service. When calculating these revenue changes, vendors need to have a strong financial management solution in place. Spreadsheets and entry-level accounting software will make it difficult to acknowledge or measure the appropriate discounts or the revenues that result. Contact BTerrell Group for more information about applying this accounting method and which financial management solutions can streamline the process, making it efficient and accurate for you and your customer. In addition, ask us how your company can prepare now to adopt the big revenue recognition accounting changes on the horizon in ASC 606 – Revenue from Contracts With Customers.