This article explains the difference between Trade and Cash discounts.
Cash discount, which are shown as Discount Allowed and Discount Received with its accounting treatment.
Trade Discount |
A manufacturer or trade normally issue a price list of their products at which the customers usually have to pay.
The allowance given from the list price is called trade discount. When a wholesaler buys from a manufacturer, the trade discount/allowance given will be higher than the allowance normally when a retailer buy from the wholesaler. As the word “trade”, the discount/allowance given is meant for higher/bulk purchase of goods and services. |
Cash Discount |
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Salient Points: |
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Accounting Treatment of Discounts: |
Illustration: Company A’s book have the following transactions relating to discounts: 2/03/06 Received from Mr ABC $2,900, discount allowed by Company A is $100 3/4/06 Paid to Supplier XYZ $4,900, discount received from XYZ is $100 Accounting entry for discount allowed: Debit: Discount Allowed (Income statement) $ 100 Debit: Bank a/c $2,900 Credit : Accounts Receivable-Mr. ABC $3,000 Being discount allowed of $100 to customer Mr ABC for prompt payment. Accounting entry for discount received: Debit: A/c Payable-XYZ $5,000 Credit: Discount Received ( Income Statement) $100 Credit: Bank a/c $4,900 Being discount received from supplier Company XYZ for $100 |