What is difference between Trade discount and cash discount

What is difference between Trade discount and cash discount and its Journal entry ?

What is trade discount ?

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

Journal entry of Purchase

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 .

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