What is Discount, Trade Discount, and Cash Discount?

What is Discount?

A discount is an amount that the seller receives less from the selling price of the product than the buyer, or the amount that the seller receives less for the purpose of quick recovery from the debtor, or the amount discounted in return for timely payment from the creditor.

Discounts are conducted in accordance with the prevailing rules of the business or on the basis of a business contract.

Discounts are of two types.

  1. Trade discount and
  2. Cash discount.

What is Trade Discount?

When a manufacturer or wholesaler gives a discount to a retailer at a fixed rate on the price listed in the price list of the product sold, that discount is called a trade discount.

The purpose of the transaction or business discount is for the retailer to make a profit by selling the product according to the price list and to increase the sales volume.

The trade discount rate depends on the market demand for the product, the competition, and the incentives for all traders, and so on.

Accounting Treatment for Trade Discount:

There is no need to enter any journal in the account book for the trade discount i.e. the invoice is made at the net price by deducting the trade discount from the predefined price of the product and this net receipt is written in the daily sales book or sales journal book.

For example, suppose 10 books were sold at a rate of $100 per book providing a trade discount of 10%.

Here,

ParticularsAmount
Selling Price ($100*10)    $1,000
Less: Trade Discount ($1,000*10%)  $100
Net Selling Price      $900   

The net selling price will be $900. In this case, Buyer has to pay $900, not $1,000. So Buyer will be debited as $900 in the seller book and the seller will be credited as $900 in the buyer book. So, in any case, it is not necessary to record the trade discount at $100.

What is Cash Discount?

A cash discount is a discount that is given to the buyer or debtor to recover the value of the goods sold on time or in a short period of time.

For example, 2/10, N / 30 means that if the debtor pays the debt amount within the first 10 days of the sale, he will get a discount of 2% and must pay the full amount within 30 days.

There are two types of cash discounts.

  • Discount Allowed and
  • Discount Received.

Discount Allowed:

Discount allowed for the seller. For example, Cash $4,900 received from the debtor in full settlement of $5,000. Here discount allowed to debtor $100.

Discount Received:

Discount received for buyers. For example, Cash $4900 paid to the creditor in full settlement of $5000. Here discount received from creditor $100.

Accounting Treatment for Cash Discount:

In the book of Seller:

DateParticularsL.F.Debit Credit
Cash$4900
Discount Allowed $100
Debtor$5000

In the book of Buyer:

DateParticularsL.F.DebitCredit
Creditor$5000
Discount Received $100
Cash $4900

You may also read:

Leave a Comment