Trade discount

Trade Discount

1. A trade discount is the reduction granted by a supplier of goods/services on the list or catalog prices of the goods supplied.

2. It is provided due to business consideration such as trade practices, large quantity orders, etc.

3. Trade discount is not separately shown in the books of accounts, and all amounts recorded in a purchases or sales book are done in the net amount only.

4. Trade discount is allowed on both credit and cash transactions.

5. Trade discount is given on the basis of a purchase.

 

Example for Trade Discount

10 vehicles were purchased by Unreal Pvt Ltd with a 5% trade discount on the list price of 1,00,000 each.

Total List Price = 10 x 1,00,000 = 10,00,000

Total Discount = 5% of 10,00,000 = 50,000

Final Invoice Price after TD = 10,00,000 – 50,000 = 9,50,000

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Cash Discount

1. A cash discount is a deduction allowed by a supplier of goods or by a provider of services to the buyer from the invoice price.

2. It is provided as an incentive or a motivation in return for paying a bill within a specified time.

3. Cash discount is shown separately in the books It is shown as an expense in the Profit and Loss A/C.

4. Cash discount is only allowed on cash payments.

5. Cash discount is given on the basis of payment.

 

Example for Cash Discount

Let’s continue the example above for the trade discount. Let us assume that the supplier in addition extended a cash discount of 2% 10 Net 30 days.

This means that if the buyer pays within 10 days of delivery, they can avail an extra 2% discount onthe Invoice price.

So, Invoice Price = 9,50,000

2% of 9,50,000 = 19,000

Net amount to be paid within 10 days = 9,50,000 – 19,000 = 9,31,000 

Hope u understand 

Thanks for the reply !!!! 

Let us take another example !!! Purchase of Medicines from XYZ . The invoice states the following :

Gross Amt 5000 

Disc. @ 15% 750

Net Amt 4250

The accounting entry passed for the above transaction is as follows:

Purchase A/c Dr. 5000 

To Disc A/c 750 

To XYZ A/c 4250 

Is the above entry passed in the books of accounts correct ?

Dear Please note i have meantion in above 

3. Trade discount is not separately shown in the books of accounts, and all amounts recorded in a purchases or sales book are done in the net amount only.

Trade Discount is the discount provided on bulk purchases and generally trade discount is not shown in the books of accounts the entry for purchase of 5,000

15% trade discount is 

Purchase A/c....Dr 4250

To Sundry Debtor/cash/bank A/c.4250

That's what I was asking. Because I was confused regarding the validity of the above accounting entry with discount. One last question: If the accounting entry is passed along with discount a/c and then such discount is transferred to Trading and Profit / Loss A/c , then is such method of accounting incorrect? And if same method is followed in case of sales, is it correct ?