Discounts

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A discount is a is the deduction from the value of a transaction. Two main types of discounts are:

  1. Trade discount
  2. Cash discount
Trade discounts

Most of the business tend to sell products by deducting a certain amount from the listed price. Therefore, a trade discount is a deduction from the listed price. This
deduction is a trade discount allowed from the side of the seller and a trade
discount received from the buyer’s side. A trade discount can be given for both cash purchases and credit purchases by the seller to the buyer.

Recording of trade discounts

We do not record the amount of trade discount in the accounts. What we record is the net value after deducting the trade discount in the accounts. Let’s take two examples of recording trade discounts from the viewpoint of seller and buyer.

Example 01:

Assume that a business sold goods for Rs. 50 000 subject to 10% trade discount. Now let’s calculate the net value of the goods purchased.

Listed price                                         = Rs. 50 000

Trade discount amount                    = Rs. 50 000 × 10÷100

                = Rs. 5 000

The net value of goods purchased =  Rs. 50 000 – 5 000

      = Rs. 45 000

Since this is a sale of goods on a cash basis, we need sales account and cash account to record it. We do not record the trade discount amount of Rs. 5 000 in the accounts. However, we record the net value after deducting the trade discount in the accounts which is Rs. 45 000 in the sales account and cash account.

The double-entry is

Cash Account    Dr.  Rs. 45 000

                        Sales Account         Cr. Rs. 45 000

If this sale of goods occurred on a credit basis, the double-entry is

Debtor’s Account    Dr.  Rs. 45 000

                        Sale’s  Account         Cr. Rs. 90 000

Example 02:

Assume that a business purchased goods for Rs. 100 000 subject to 10% trade discount. Now let’s calculate the net value of the goods purchased.

Listed price                                         = Rs. 100 000

Trade discount amount                    = Rs. 100 000 × 10÷100

                = Rs. 10 000

The net value of goods purchased =  Rs. 100 000 – 10 000

      = Rs. 90 000

Since this is a purchase of goods on a cash basis, we need purchases account and cash account to record it. We do not record the trade discount amount of Rs. 10 000 in the accounts. However, we record the net value after deducting the trade discount in the accounts which is Rs. 90 000 in the purchases account and cash account.

The double-entry is

Purchases Account    Dr.  Rs. 90 000

                        Cash Account         Cr. Rs. 90 000

If this purchase of goods occurred on a credit basis, the double-entry is

Purchases Account    Dr.  Rs. 90 000

                        Creditor’s  Account         Cr. Rs. 90 000

Cash discounts

A cash discount is a deduction from the amount due to prompt the payment within a given period. Unlike trade discounts, cash discounts are recorded in accounts. There are two types of cash discounts: discounts allowed and discounts received

Discounts allowed

Generally, a business (seller) offers a cash discount to its credit customers to motivate them to pay earlier within a specific period. The business has sold goods on credit to these credit customers.  Therefore, these customers owe to the business. We call such customers as debtors. Discounts allowed are the discounts given to debtors by the business to prompt their amounts due. Therefore, when the business receives cash from the debtor within the given period, the business makes a deduction from the debtor’s amount due. Accordingly, the business receives a lesser amount than the sale value.  As a result, a discount allowed becomes an expense to the business.

When the business receives cash from debtors after deducting the cash discount, the business records the amount of discount allowed in the cash book. The cash book has a separate column named discounts allowed in the debit side of the cash book to record all the discounts allowed.

The double-entry of discount allowed is

Discounts allowed account  Dr. Rs. …………..

           Debtor’s account               Cr. Rs. ……………

Discounts received

A business can receive cash discounts from its credit suppliers. The business has purchased goods on credit from these suppliers. Therefore, the business owes to these credit suppliers. We call such suppliers as creditors. Discounts received are the discounts received to the business by its creditors. Therefore, when the business pays cash to the creditor within the given period, the creditor makes a deduction from the business’s amount due. Accordingly, the business pays a lesser amount than the purchase value.  As a result, a discount received becomes an income to the business.

When the business pays cash to creditors after deducting the cash discount, the business records the amount of discount received on the cash book. The cash book has a separate column named discounts received on the credit side of the cash book to record all the discounts received.

The double-entry of discount received is

Creditor’s account  Dr. Rs. …………..

          Discounts received account       Cr. Rs. ……………

Categories: Accounting

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