Understanding how discounts are applied to sales is crucial for accurate billing and maintaining profitability. This article will explain the two primary methods for applying discounts:
Discounts Before Tax: Discounts are subtracted from the sales price before tax is calculated.
Discounts After Tax: Discounts are subtracted from the sales price after tax is calculated.
We will explore how these methods impact the final amount paid by the customer and provide illustrative examples.
Understanding Sale Mechanics and Discounts
Discounts Before Tax
Individual Line-Item Discounts: Discounts specific to individual products or services are subtracted from their respective prices.
Global Discount: A general discount (e.g., a percentage-based discount for all items) is calculated based on the total of all individual sales prices after line-item discounts have been applied.
The total value of the global discount is divided over all items on the sale on a prorated basis
Tax Calculation: Tax is then calculated on the remaining amount (sales price after all discounts).
Example:
Product Price: $100.00
Individual Discount: $5.00
Global Discount: 10%
Price After Line-Item Discount: $100.00 - $5.00 = $95.00
Price After Global Discount: $95.00 - ($95.00 * 0.10) = $85.50
Tax (15%): $85.50 * 0.15 = $12.83
Total Payable: $85.50 + $12.83 = $98.33
As seen on the Sale Totals
Subtotal: $100.00
Discount: $ 14.50 ($5.00 + $ 9.50)
Tax: $ 12.83
Grand Total: $ 98.33
Discounts After Tax
Individual Line-Item Discounts: Discounts are subtracted from the individual product prices including tax.
Global Discount: A general discount is calculated on the total amount after line-item discounts (including tax) have been applied.
Tax Adjustment: The tax portion of the discounts is subtracted from the total tax amount to avoid overstating tax.
Example:
Product Price (including 15% tax): $115.00
Individual Discount: $5.00
Global Discount: 10%
Price After Line-Item Discount: $115.00 - $5.00 = $110.00
Price After Global Discount: $110.00 - ($110.00 * 0.10) = $99.00
Total Payable: $99.00 (inclusive of 15% tax of $12.91)
As seen on the Sale Totals
Subtotal: $100.00 ($115-$15 tax)
Discount: $ 16.00 ($5+$11) *includes $2.09 tax
Tax: $ 12.91 ($15-$2.09 from discounts)
Grand Total: $ 99.00
❗Important Note:
Invoices will display line charges after individual line-item discounts, but before the global discount is applied.
When a Global Discount is applied, manually summing the tax column values on an invoice will not match the total tax due to #1
The example below if for a clinic that is calculating discount before tax.
Why do I need to know this?
By understanding the mechanics of how discounts are applied, businesses can ensure accurate billing, avoid over-discounting, and maintain profitability.
❗This article provides general information and may not be applicable to all situations.
FAQs
How will I know the total discount passed on an invoice?
This appears in the Discount field of Payment section of a Record or Counter Sale
How will I know the total tax paid on an invoice?
This appears in the Tax field of Payment section of a Record or Counter Sale
Why is the tax more when I apply discounts after tax than before tax?
When you apply the discount after tax, the tax amount is calculated on the full price, which results in a higher tax amount, even after offsetting the taxable portion of the discount.
How will I be able to analyze all the discounts passed?
You can use the Discounts Report to analyze your discounting habits and amounts
How do I know whether I should be passing discounts before or after tax?
Each country has their own tax laws, please check with your accountant or tax authority to clarify which option is needed.
How can I change from passing discount after tax to before tax or vice versa?
To make these changes, please contact us via our support channels or your customer success.