Accounting treatment of trade discount and cash discount

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Daya (Querist)
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25 January 2025 what will be the accounting treatment of Trade discount and cash discount for
Discount Given
Discount Received
whether discount given should be part of other expenses
discount received should be part of indirect income.
please reply

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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12 August 2025 1. Trade Discount
Definition: A reduction in the list price given by the seller to the buyer, usually based on quantity or agreement.

Accounting Treatment:

Not recorded separately in the books.

The invoice amount is recorded net of trade discount.

Example:
List price = ₹10,000
Trade discount = 10% = ₹1,000
You record sales or purchase = ₹9,000 only.

2. Cash Discount
Definition: A discount allowed or received for prompt payment.

Accounting Treatment:

Recorded separately in the books as an expense or income.

Discount Given:

Treated as an expense or reduction from sales revenue (sometimes shown as "Discount Allowed").

Debited to Discount Allowed account (Expense side).

Discount Received:

Treated as other income or reduction in purchase cost (sometimes shown as "Discount Received").

Credited to Discount Received account (Income side).

Summary Table:
Discount Type Discount Given (By you) Discount Received (By you)
Trade Discount Not recorded separately; sales recorded net of discount Not recorded separately; purchases recorded net of discount
Cash Discount Recorded as expense (Discount Allowed) Recorded as income (Discount Received)

Example entries for Cash Discount:
Discount Given:
When customer pays early and gets discount:
Dr. Discount Allowed A/c (Expense)
Cr. Customer / Bank A/c

Discount Received:
When you pay early and get discount:
Dr. Supplier / Bank A/c
Cr. Discount Received A/c (Income)

Important:
Trade discount reduces the value of sale/purchase directly and is not shown separately in the accounts.

Cash discount is accounted for separately.

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