The seller gives some discount to the buyer from the price of the product sold, this discount is called trade discount. Trade discount is only applicable to the sale and purchase of goods.
After deducting the trade discount from the MRP price of the product the sale price is determined and the invoice is created. The trade discount is not shown in the cash book.
Reasons behind the trade discount not-accounted for:
After deducting the trade discount from the listed price of the product, the selling price of the product is determined which is recorded in the books of account of both the buyer and the seller. Trade discounts are generally not accounted for the following two reasons:
- The trade discount does not change the financial condition of the buyer or seller.
- The net sale price is determined by excluding the trade discount, and the actual purchase or sale price refers to the net purchase or sale price.
For example, suppose a book has an MRP price of $200 and a seller gives a 10% trade discount on the sale price of the book at the time of sale. In this case, after deducting the trade discount of $20, the selling price of the book will be ($200-$20) = $180. $180 dollars will be written in the books of account of both the buyer and seller.
The trade discount of $20 has been waived before the amount of debt owed between the buyer and the seller. So this trade discount of $20 dollars won’t be recorded in the accounts book.
Thus, it can be said that the trade discount is a type of discount that does not change the financial condition of the buyer and the seller, only it is shown on the invoice, so the trade discount is not shown in the book of accounts.
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