Where should trade discount given to a customer be shown?
ACCOUNTING ENTRIESCash DiscountAs mentioned in Trade Discount vs. Cash Discount — Part 1 , cash discounts are offered by suppliers to encourage prompt payments/early settlements by customers. From a supplier’s point of view, the quicker he can get his money back, the less likely his customer will default on payment. Show Discount AllowedFrom a business’ point of view, the cash discount that it offers to its customers is known as discount allowed. For example, let us take a look at the terms the business offered to Becky’s Cafe:  This means that Becky’s Cafe has 30 days from the invoice date to make payment to the business. If Becky’s Cafe were to pay up within 7 days from the date of the invoice, it will be able to enjoy a 5% cash discount off the invoiced amount. Next, let us have a look this sales transaction with Becky’s Cafe made on 10 Jan: Based on the credit terms given by the business, Becky’s Cafe has until 9 Feb (30 days) to make payment for this sales transaction. If Becky’s Cafe pays up anytime from 10 Jan to 17 Jan, it will enjoy a 5% cash discount, meaning that it only has to pay $1,520. If it misses this period, it will forfeit the cash discount on this transaction and will have to pay the full amount of $1,600 to the business. Why is Discount Allowed an expense?As the business wants to ensure that it can collect the debts owed by its customers, it offers them a cash discount. Because of this, the business incurs a “cost” in order to ensure quick collection, which will result in it collecting less than the full invoiced amount. Assuming Becky’s Cafe paid up on 15 Jan, it is then entitled to the 5% cash discount. The double entries will be as follows: The discount allowed will then appear on the Income Statement as one of the expense items. Discount Received and why is it an income?From the same business’ point of view, the cash discount offered to it by its suppliers is known as discount received. Some students get confused as to why discount received is treated as an “income”. Think of it this way: by paying its suppliers early, the business “earned” the discount resulting in it paying less than what it originally owed to the supplier. Now, let us take a look at the terms offered to the business by Venus Pte Ltd, and the transaction which took place on 12 Jan: The payment deadline for this purchase transaction is 11 Feb, and if the business makes payment before 26 Jan, it will be entitled to a 3% cash discount offered by Venus Pte Ltd. Assuming the business made payment on 21 Jan, it then only has to pay 97% of the invoiced amount owed to Venus Pte Ltd. The double entries will be as follows: The discount received will then appear on the Income Statement as one of the Other Income items. ConclusionThis sums up the two types of discounts that you will encounter in your POA studies. By understanding their differences and accounting treatments, this topic should give you easy marks if it appears in your exams.
Advertisement ACCOUNTING ENTRIESTrade DiscountAccording to accounting rules, trade discounts are not posted to the ledger. As such, you are only allowed to recognize and post the invoiced amounts. Look at the following example: John’s Sports Apparels and Becky’s Cafe are both given trade discounts by the business. The list price (full amount) and the discounts are not recognized. Instead, only the invoice amount is posted to the ledger since it is the price that the business and its customer agreed on. Next, you will do your double entry as usual. Remember, whenever a sales is made, you will need to do 4 entries: Trade Receivables/Cash At Bank, Sales Revenue, Cost of Sales, and Inventory. Likewise, when the business receives trade discounts from its suppliers, it only recognizes the invoiced amounts (after trade discounts) in its Purchases Ledger. Unlike sales journal entries, for purchases remember that you only make 2 entries: Inventory and Trade Payables/Cash At Bank.
Everyone loves a discount. For your POA studies, you need to know two types of discounts, their purposes, the way they are recorded in the accounting books, and most importantly, their differences. How is trade discount shown on the invoice?Trade Discount is not specifically shown in the company's financial books, and all the transactions are entered in the purchases or sales book in net amount only. In contrast, Cash Discount separately appears in the financial books, as an expense in the Profit and Loss Account.
How are trade discounts shown on the income statement?Reporting the Discount
Report the amount of total sales discounts for an accounting period on a line called “Less: Sales Discounts” below your sales revenue line on your income statement. For example, if your small business had $200 in discounts during the period, report “Less: Sales discounts $200.”
Is trade discount shown in Journal?Trade discount is never shown in a journal entry as sales is considered net of this trade discount.
How is trade discount treated in the books of accounts?In the case of Trade discounts, there is no entry made in the books of accounts of the buyer and seller. It is always deducted before any type of exchange takes place. Hence, it does not form part of the books of business accounts. It is usually allowed at the time of purchase.
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