Journal entry of Discount received and Discount allowed in Accounting
What is a discount Received in accounting?
When cash or cheque is paid to supplier discount is received from him. Discount received is profit for the business. The discount during the time of payment to the party.
The only that is shown in the books of accounts are Cash discounts whereas Trade discounts are not shown in the accounting books they are just deducted and written in the narration of journal entry.
Cash discount received is profit for the business therefore they are shown in the profit side of Profit and loss accounts.
What is the Journal Entry for Discount Received?
Let’s understand it with examples.
Suppose Purchase goods from Ravi Rs. 10000.
the journal entry for the same will be.
Purchase a/c Dr. | 10,000 |
To Ravi. | 10,000 |
(being goods purchase from Ravi) | |
Now we have to pay money to Ravi Rs 10,000 but we request him to give us a discount of 500 on purchase we made from him under such conditions if Ravi allowed us a discount in the payment of goods of Rs. 10000 that is cash discount received.
The journal entry for the same will be .
Ravi Dr | 10,000 |
To cash A/c | 9,500 |
To discount Received A/c | 500 |
(being cash paid to Ravi and discount received) | |
Note
- Ravi is debited to close the Account of Ravi which was in earlier entry credited so by debited it we close the account.
- A new account Discount Received account is open and credited because its income for business because its a nominal account and also to balance the credit side .
What is a discount Allowed in accounting?
When cash or cheque is received from customer discount is allowed by us to customer. Discount Allowed is Loss for the business. The discount during the time of received to the customer..
The only that is shown in the books of accounts are Cash discounts whereas Trade discounts are not shown in the accounting books they are just deducted and written in the narration of journal entry.
Cash discount Allowed is Loss for the business therefore they are shown in the Loss side of Profit and loss accounts.
Let’s understand it with examples.
What is the Journal Entry for Discount Allowed?
Suppose Sold goods from Ramesh Rs. 10000.
the journal entry for the same will be.
Ramesh a/c Dr. | 10,000 |
To sales a/c | 10,000 |
(being goods sold to Ramesh) | |
Now we have to receive money from Ramesh Rs 10,000 but he requests us to give him a discount of 500 on sale we made to him under such conditions if we allowed discount to Ramesh.then we need to open a new account in books that is discount Allowed.
The journal entry for the same will be .
Cash Dr | 9,500 |
Discount Allowed A/c | 500 |
To Ramesh | 10000 |
(being cash received and discount allowed to Ramesh) | |
Note
- Ramesh is credited to close the Account of Ramesh which was in earlier entry Debited so by Credited it we close the account.
- A new account Discount allowed account is open and Debited because its Expense for business because its a nominal account and also to balance the Debit side.
Discount Received | Discount Allowed |
Purchase goods from Ravi Rs. 10000. | Sold goods from Ramesh Rs. 10000. |
Purchase a/c Dr. 10,000 To Ravi. 10,000 (being goods purchase from Ravi) | Ramesh a/c Dr. 10,000 To sales a/c 10,000 (being goods sold to Ramesh) |
we request him to give us a discount of 500 on purchase we made from him | he requests us to give him a discount of 500 on sale we made to him |
Ravi Dr 10,000 To cash A/c 9,500 To discount Received A/c 500 (being cash paid to Ravi and discount received) | Cash Dr 9,500 Discount Allowed A/c 500 To Ramesh 10000 (Being cash received and discount allowed) |
Discount in case of dishonored of cheque
let understand it with example.
1 Jan. Ramesh paid a cheque of Rs 9800 and received a discount of Rs 200. to Manish
4 Jan Ramesh’s cheque was dishonored.
Now see the entry in the books the Ramesh and Manish
Ramesh Books | Mahesh Books | ||
Particular | Amount | Particular | Amount |
When a cheque is issued | When a cheque is received | ||
Mahesh Dr. | 10,000 | Bank Dr. | 9800 |
To bank A/c | 9800 | Discount Allowed Dr | 200 |
To discount received A/c | 200 | To Ramesh | 10,000 |
(being cheque paid ) | (being Cheque receive) | ||
When cheque is dishonored | When cheque is dishonored | ||
Discount received A/c Dr | 200 | Ramesh A/c Dr | 10,000 |
Bank A/c Dr. | 9800 | To Bank A/c | 9800 |
To Mahesh | 10,000 | To discount Allowed | 200 |
(adjustment of discount) | (adjustment of discount) |
| |
The difference between discount received and discount allowed.
Criteria | Discount Received | Discount Allowed |
Definition | Reduction in the purchase price | Reduction in the selling price |
Financial Statement | Decreases expenses in the income statement | Decreases revenue in the income statement |
Nature | Benefit to the company (Buyer) | Benefit to the customer (Seller) |
Occurrence | In purchases made by the company | In sales made by the company |
Treatment in Accounts | Deducted from the cost of purchases | Deducted from the revenue from sales |
it’s important for businesses to carefully record both discounts received and discounts allowed to maintain accurate financial records and assess the impact of these discounts on the company’s overall profitability. Additionally, businesses should analyze the frequency and magnitude of these discounts to make informed decisions regarding their purchasing and sales strategies.
FAQ
Do we make trade discount journal entry ?
Trade discount, there is no entry made in the books of accounts of the buyer and seller. It is always deducted before any type of exchange takes place. Therefore, it does not form part of the books of accounts of the business. It is usually allowed at the time of purchase.It is written on the narration.
