Types Of Discounts And Accounting Treatment For Discount Allowed and Discount Received

August 8th, 2006 Comments off
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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
  • Cash discount is an allowance for prompt payment and is based on the Net Price List;
  • An allowance given to Customers is known as Discount Allowed and
  • An allowance made by creditors off the amount owing is called Discount Received.
Salient Points:
  • List price is the original price list of the manufacturer/trade which is before any allowance where trade or cash discount is given;
  • List price after trade discount given is called Net price;
  • Using this Net price, cash discount is computed.
  • TRADE discount is to do with the bulk/volume discount due to higher volume of purchases of goods and services from the company’s suppliers whilst CASH discount is to do with discount given for prompt payment;
  • Where both a trade and a cash discount is given namely say a company buys large amount of goods and promise to pay to the supplier very promptly, the company can enjoy both the trade and cash discount. However, the trade and cash discount need to be calculated separately with the trade discount first followed by the cash discount.
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

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