A trade discount is discount generally given by whole seller to retailer . Trade Discount refers to the deduction given by the supplier to the customer in the catalog price of the goods.
Let’s understand with example :
Whole seller has goods Item A List Price Rs 1000 per unit. .But it retailer purchased goods in bulk then then prices are
Item purchased | Price |
1000 units | Rs. 950 |
2000 units | Rs. 930 |
3000 units | Rs 900 |
They are in form of percentage .
Item purchased | List price Rs 1000 (discount on list price) |
1000 units | 2% |
2000 units | 3% |
3000 units | 4% |
It is shown in the bill when bill is prepared by the whole seller they show the discount in the bill
As shown below .
Bill no | 10023 | Date | 1/1/21 | ||
S.no | Item | Price | Discount | Units | Amount |
1 | Item A | 1000 | 1% | 100 | 99,000 |
|
|
| Tax | 10% | 9,900 |
|
|
|
| Total amount | 108000 |
- Trade discount is shown in the bill as shown above.
- Trade discount are given on list price
- They are given by whole seller to retailer so there profit will increase
- They are given to make maximum sales and motivate buyer to buy more.
- It is allowed on both credit and cash transactions.
- It shows discount on bulk purchase .
- It is provided due to business consideration such as trade practices, large quantity orders, market competition, etc.
Journal entry of trade discount in accounting books.
Example : Mahesh purchase goods worth Rs 10,000 from Mukesh and gets trade discount 5%.
Calculation of trade discount
10,000 * 5/100 = 500 (trade discount)
500 will be deducted from 10,000
10,000- 500 = Rs. 9500
9500 is to be shown in Journal entry.
Journal entry of Trade Discount
In the books of Mahesh.
Particular | Amount |
Purchase A/c Dr. | 9500 |
TO Mukesh | 9,500 |
(being goods purchased and trade discount @ 5%) | |
In the books of Mukesh.
Particular | Amount |
Mahesh Dr. | 9500 |
TO sales A/c | 9,500 |
(being goods and trade discount @ 5%) | |
Now both parties deduct trade discount in accounting books .It not shows in accounting books.
What is a Cash Discount?
A cash discount is a discount allowed by the supplier of goods to its customer to get quickly or early received on cash or cheque.
Some point to know about Cash discount
- Cash discount for one party is discount received and for another, it is discount allowed.
- These discounts are made to encourage prompt receipt of cash or prompt payment of cash.
- Cash Discount recorded at the debit side of the cash book as discount allowed, whereas discount received appears at the credit side of the cash book.
- Such discount is allowed only when the customer makes payment of the debt within the stipulated time, before to the due date of the credit period.
- It is calculated on a percentage basis on the total amount payable by the customer.
- Discount allowed is an expense whereas discount received is income
Journal entry of discount Received
Example of discount received
Let’s understand it with example.
Ramesh purchase goods worth Rs 20,000 from Suresh .
Journal entry will be in books of Ramesh.
Particular | Amount |
Purchase A/c | 20,000 |
To Suresh | 20000 |
(being goods purchased from Suresh) | |
Paid cash to Suresh Rs 19,500 and cash discount received Rs 500.
Particular | Amount |
Suresh | 20000 |
To cash A/c | 19,500 |
To Discount received | 500 |
(being cash paid and discount received) | |
- Discount received account need to be open
Note: Cash Discount received account is Nominal by nature and discount received is profit or gain.
- Discount received is income (nominal account)
- As per nominal account Cr on income or gain
Journal entry of discount Allowed
Example of discount Allowed
Sold Goods to Rajesh Rs .20000 .
When goods are sold.
Particular | Amount |
Rajesh Dr | 20,000 |
To Sales A/c | 20000 |
(Being goods sold to Rajesh)
| |
Received cash from Rajesh 19500 and discount allowed to him Rs 500
Particular | Amount |
Cash A/c Dr. | 19,500 |
Discount Allowed A/c Dr. | 500 |
To Rajesh | 20000 |
(Being cash Received from Rajesh and discount allowed ) | |
- Note : discount allowed is nominal and loss .
- As per rule of nominal account debit all expenses and losses.
- In this case we got payment of 19500 from Rajesh instead of 20000 and discount allowed Rs 500.
Example of trade discount and cash discount
Nature owns purchase goods worth Rs 100000 from Durga traders on 1 Jan 2021 get trade discount 5% . Half of the payment is made on 1 Jan 2021 and gets cash discount 2%.
Note here we have to considered trade discount and cash discount .
Trade is deducted at the beginning and cash discount is considered at the time of payment or receipt only.
Trade discount is 5%.
Value of goods is
Rs 100000 X 5 /100 = 5000
100000- 5000= 95,000.
Value of goods is 95,000
½ of payment is made at the time of purchase therefore ½ of 95000 is 95,000 /2 = 47,500
Now on this 47,500 cash discount of 2% is received
47,500/ 2 = 950
Now value of cash to be paid on the time of purchase is 47500 – 950 = 46550
Rs 46550 is the value of cash paid on the time of purchase
Rs 950 is the discount received at the time of purchase
Rs 47500 still pending to Durga Traders.
Journal entry will be
Date | Particular | Amount |
1/Jan/2021 | Purchase A/c | 95000 |
| To Cash A/c | 46550 |
| To discount Received A/c | 950 |
| To Durga Traders A/c | 47500 |
(being goods purchased trade discount 5% and cash discount on ½ payment @ 2%) | ||
- Here we can know that cash discount is given at the time of payment or receipt.
- Trade discount is only shown in bill no accounting entry .
Difference between Trade discount and cash discount in books of accounts
Trade Discount | Cash Discount |
Trade Discount is a subtraction from the list price of the goods, allowed by the trader to the customer at an agreed rate. | Cash Discount is a discount allowed to the customer, they makes cash payment of the goods purchased, within the defined time. |
Trade discount is allowed on both cash and credit transactions | cash discount is allowed to the customers only on cash payments. |
It is provided due to business consideration such as trade practices, large quantity orders, market competition, | It is provided so the supplier of goods can get prompt receipt of cash or cheque. |
There is no separate journal entry for trade discount allowed or received as it is not recognized as an expense for the business | There is separate journal entry for cash discount allowed or received as it is not recognized as an expense or income for the business |
Trade discount are shown in the invoice. | Cash discount are not shown on invoice. |
It is allowed by whole seller to retailer to get more sale in business. | It is allowed by supplier to get prompt receipt . |
Trade Discount | Cash Discount |
Trade Discount is a subtraction from the list price of the goods, allowed by the trader to the customer at an agreed rate. | Cash Discount is a discount allowed to the customer, they makes cash payment of the goods purchased, within the defined time. |
Trade discount is allowed on both cash and credit transactions | cash discount is allowed to the customers only on cash payments. |
It is provided due to business consideration such as trade practices, large quantity orders, market competition, | It is provided so the supplier of goods can get prompt receipt of cash or cheque. |
There is no separate journal entry for trade discount allowed or received as it is not recognized as an expense for the business | There is separate journal entry for cash discount allowed or received as it is not recognized as an expense or income for the business |
Trade discount are shown in the invoice. | Cash discount are not shown on invoice. |
It is allowed by whole seller to retailer to get more sale in business. | It is allowed by supplier to get prompt receipt . |