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Cash discount and trade discount

Tom S Peter (Article) (148 Points)

24 August 2011

Guys jst tell me the accounting treatment of cash and trade discount.

Whether both has to be shown and accounted or only trade discount?

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13 Replies

Dhanabal Ramasamy (CHARTERED ACCOUNTANT) (105 Points)
Replied 24 August 2011

Hi.........

Only Cash discount is to accounted. Discount given - indirect expenses, Discount received - indirect income.

Trade discount should not be taken into account.

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 24 August 2011

In Industries so many trade discounts are giving which are made aware in the markets too if trade discounts are not be shown in accounts then how they are to be accounted

For example offtake of a particular product in a particular month

this offtake qty will be known only next month so we give a credit note and account the same

let me have a clarity as to what is meant by trade discounts and if not be accounted then explain how this offtakes are to be accounted

CHIRAG DEEPAK GANATRA (CA FINAL) (1054 Points)
Replied 24 August 2011

only cash discount is to be booked in books of accounts

surender (Manager Accounts) (149 Points)
Replied 25 August 2011

Mostly trade discouunt are not shown in the books. Yes cash discount is shown in the books.

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 25 August 2011

TRADE DISCOUNTS: Product catalogs often provide a "list price" for an item. Oftentimes those list prices bear little relation to the actual selling price. A merchant may offer customers a trade discount that involves a reduction from the catalog or list price. Ultimately, the purchaser is responsible for the invoice price, that is, the list price less the applicable trade discount. Trade discounts are not entered in the accounting records. They are not considered to be a part of the sale because the exchange agreement was based on the reduced price level. Remember the general rule: sales are recorded when an exchange takes place, based on the exchange price. Therefore, the amount recorded as a sale is the invoice price.

If sales price is $ 5,000 with 20% trade discount, journal entry will be

1-5-X5	Accounts Receivable	4,000
	Sales		4,000
	Sold merchandise on account

CASH DISCOUNTS: Merchants often sell to other businesses. For example, assume that Barber Shop Supply sells equipment to various barber shops on open account (i.e., a standing agreement to extend credit for purchases). In these settings, the seller would like to be paid promptly after billing, and may encourage prompt payment by offering a cash discount (also known as a sales discount).

There is a catch, though. To receive the cash discount, the buyer must pay the invoice promptly. The amount of time one has available to pay is expressed in a unique manner, such as 2/10, n/30 -- these terms mean that a 2% discount is available if the invoice is paid within 10 days, otherwise the net amount is expected to be paid within 30 days. Barber Shop Supply issued the invoice at right, and would record the following entry. Please take note of the invoice date, terms, and invoice amount.

5-11-X4	Accounts Receivable	1,000
	Sales		1,000
	Sold merchandise on account, terms 2/10,n/30

If Hair Port Landing pays the invoice in time to receive the discount, the check
at right for $980 would be received by Barber Shop Supply, and recorded via the
following entry. This entry reflects that the customer took advantage of the
discount terms by paying within the 10-day window. Notice that the entry reduces
Accounts Receivable for the full invoice amount because the payment satisfied the
total obligation. The discount is recognized in a special Sales Discount account.

5-19-X4	Cash	980
	Sales Discounts	20
	Accounts Receivable		1,000
	Collected outstanding receivable within discount period, 2% discount granted

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Dinesh Kumar Agarwal (Article clerk) (117 Points)
Replied 26 August 2011

Good explanation by Bhaskar Unnikrishnan

GAURAV SHRAWAGI (NAGPUR) (394 Points)
Replied 29 August 2011

cash discount is always shown,,,,,,,,,,,,,,,,,,,,,,,,trade discount is never shown,,,,,,,,,,,,,,,

SUNIL (ACCOUTANT) (167 Points)
Replied 29 August 2011

Cash discount is shown in the book.

Dr Discount Allowed

Cr Party A/c

Thanking You

SUNIL

Gulshan Kumar (Professional Accountant) (119 Points)
Replied 30 August 2011

cash disc. is shown in the books of accounts

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 30 August 2011

Finally myself got clarified on what it is

Cash Discount is an expense so shown on debit side of p&L

Trade Discounts are of Two Types

Qty Increase-Not Shown

Price Adjustment-Accounted by Credit Note as an adjustment to revenue

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Shiripurapu Naveen Kumar (Article Assistant at Vithisvaran & Co Chartered Accountants) (54 Points)
Replied 29 January 2014

In the above explanation by Bhaskar Unnikrishnan sir ,there is Accounting of Cash Discount by giving Debit to Sales Discount A/c. But all the above persons conveying as not to show cash discount,can u explain me in brief

nidhish (associate) (27 Points)
Replied 27 September 2015

Hi Sirs, Got a clear idea what is both discounts.However may I ask ' Why is Trade discount not disclosed in accounts even it act as an expense for business. It can be considered as accounted as it is deducted from Sales figures.But how can one know how much trade discount has been released over a period. What if one simply hide his Sales figures saying he has provided trade discount and is there any maximum limit for providing trade discount?