4. trade discount
It is the deduction from the list price
or catalogue price, usually allowed by
wholesalers to retailers on bulk purchases. It is
deducted in the invoice from the list price and
the net amount only is recorded in the books
of accounts.
5. TREATMENT OF TRADE DISCOUNT WITH
EXAMPLE
A sold to B goods of the catalogue price of R.s.
10000 at a tade discount of 10%.
* The journal entry in the book of A :
B's A /c Dr. 9000
Sales A/c 9000
( sold goods on credit)
( 10000-10% discount= 9000)
6. *journal entry in books of B is :
Purchase A/c Dr. 9000
A's A/c 9000
( Bought goods on credit)
7. cash discount
It is the reduction allowed by
the creditor to the debtor, usually on making
prompt payment. Such a reduction is an
expense to the creditor who allows it and an
income to the debtor who make the payment at
a lesser amount.
8. TREATMENT OF CASH DISCOUNT
WITH EXAMPLE
X owes an amount of R.s.1000 to Y. X makes the
payment promptly and Y allows a reduction of
R.s.50.
The reduction of R.s.50 is the cash discount, it
is an income to X and expense to Y.
9. *journal entry in the books of Y, on receipt of
the amount :
Cash A/c Dr. 950
Discount A/c Dr. 50
X’sA/c 1000
(cash received &discount allowed)
*journal entry in the books of X on payment:
Y’sA/c Dr. 1000
CashA/c 950
DiscountA/c 50
(cash paid and discount earned)
10. Differences between trade discount & cash
discount
Trade discount
• It is allowed by the
wholesalers to the retailers.
• The main purpose is to
increase sales.
• Given at the time of
sales.
• Not recorded in the books.
• Deducted from the invoice
price.
Cash discount
• It is allowed by the creditor
to the debtor.
• The main purpose is to
ensure prompt payment.
• Given at the time of
payment.
• Recorded in the books.
• Not deducted from the
invoice price.
