The principle: the discount is booked on payment
When the invoice arrives, it is not yet certain whether the discount will be taken. So the buyer first books the invoice in full. Only on payment does the difference appear. It is split into a net portion and a VAT portion. The seller does the mirror image.
The following examples use generic account names. Account numbers depend on the chart of accounts used, e.g. the German standard charts SKR 03 or SKR 04, and many accounting systems keep separate discount accounts per VAT rate. Please agree the details with your tax adviser.
Example: invoice of €1,190 with a 2% discount
A retailer buys goods for €1,000 net plus 19% VAT, i.e. €1,190 gross. The payment terms are: 2% within 10 days, net 30 days. The retailer pays €1,166.20 after 8 days. The discount is €23.80, of which €20.00 net and €3.80 VAT.
Entries for the buyer
| Transaction | Debit | Credit |
|---|---|---|
| Invoice received | Purchases €1,000.00 Input VAT €190.00 | Trade payables €1,190.00 |
| Payment with discount | Trade payables €1,190.00 | Bank €1,166.20 Discounts received €20.00 Input VAT €3.80 |
After payment the books show €980 of expense and €186.20 of input VAT. The input VAT correction of €3.80 follows from § 17 (1) sentence 2 UStG and belongs in the VAT period of the payment.
Entries for the seller
| Transaction | Debit | Credit |
|---|---|---|
| Invoice issued | Trade receivables €1,190.00 | Revenue €1,000.00 Output VAT €190.00 |
| Payment received with discount | Bank €1,166.20 Discounts granted €20.00 Output VAT €3.80 | Trade receivables €1,190.00 |
Under § 17 (1) sentence 1 UStG the seller now owes only €186.20 VAT. The discounts granted reduce revenue.
Special case: discount on fixed assets
If a business buys a machine or another fixed asset and takes a discount, the discount is not booked as income. Under § 255 (1) sentence 3 of the German Commercial Code (HGB), reductions in the purchase price that can be individually allocated to an asset are deducted from its acquisition cost. The discount therefore reduces the acquisition cost and thus the basis for depreciation.
Example: a machine costs €11,900 gross (€10,000 net). With a 3% discount, €357 is deducted, of which €57 is VAT. The acquisition cost falls from €10,000 to €9,700, and input VAT from €1,900 to €1,843.
Mixed VAT rates
If an invoice contains items at 19% and 7%, split the discount by rate and book each portion with its tax. How this works is shown in the article Cash discount and VAT.
Typical booking errors
- Gross discount booked as income: input VAT then stays too high. The tax correction is missing.
- Correction in the wrong month: the correction belongs in the period of payment, not of the invoice (§ 17 (1) sentence 7 UStG).
- Discount booked after the deadline: if the buyer paid late and still deducted it, the liability has not been extinguished. The rest remains an open item.
- Discount on fixed assets booked as income: the discount reduces the acquisition cost.
Tip
The cash discount calculator creates the booking example for your invoice amount and VAT rate, from the buyer's or the seller's point of view. How to decide whether the discount is worth taking at all is explained in the article Supplier credit.