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.
|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.
|Accounting Treatment of Discounts:|
Company Aâ€™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