What is difference between Trade discount and cash discount & journal Ent

28Aug, 2021

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

Table of Contents

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.

Cash discount (Discount received and Discount allowed)

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 .