query

Is this to do with purchases or sales. in both cases this should reduce the purchase or sales.

Mr Sunil I want a debate on this where also this question was raised whether trade discount is to be brought into books or not

In the company which I worked which manufactures Tyres there will be Number of Trade Discount circulars coming and which will be intimated to the market if such discounts are not brought into books then how this will be accounted can you throw some light on this point

It has to be accounted in the books. If the company that you are representing gives you a trade discount through the distributor from whom you buy, your purchase cost is reduced straight away. There are more complex situations. Consider a company selling laptops / desktop computers through a retailer. There are two types of benefits. First a front end discount given by the distributor of the company based on volumes the retailer purchases. This is a straight  forward reduction in sale price of distibutor and he adjusts it by credit note reducing the sale invoice and VAT the charges at Month End or Quarter end as contracted or agreed.. This is a discount based on volume purchased in the month from the particular distributor.

In addition to this the computer company gives a back end support to the retailer based on total numbers sold in the month irrespective of the distributor the purchase was made from and this can be in form of cash or even a discount coupon to purchase some goods froma distributor. They may even support with kind. They may also foot advertising and promotional bills for hoardings etc. They deduct TDS for cash and kind in all such instances andthe amount is either your income or you may reduce some expenses incurred like advertising etc.

Whether front end or back end it is a discount and has to be recorded in books of account to increase your income or reduce your expense as applicable.

Most cases of trade discount I have come across are the former front end discounts. All are recorded especially since they are on condition of volumes and on month end your purchase is adjusted in accounting.

In case of your tyre company the trade discount is administered by the distributor itself. The accounting has to be done during the financial year. It may not be done Tatkal as the new discount circulars come. It may be adjusted on a monthly or quarterly basis by the distributor. There could be retrospective applicability for few days also. (eg. you may have puchased goods say from 1st to 7th of the month and the discount would be appliable on volumes purchased from the 1st day of the month itself. Sometimes the distributors wait for the adjustment from the company because the stock they hold is the stock that they purchased at higher rates.

Thanks Mr Sunil for your reply in this regard