Discount

DISCOUNT

It is a rebate or an allowance given by the seller to the buyer. It is of two types:

1.     Trade Discount

2.     Cash Discount

Trade Discount: When discount is allowed by a seller to its customers at a fixed percentage on the list or catalogue price of the goods, it is called trade discount. It is allowed when goods are purchased in bulk i.e. large quantity. It is allowed both on credit as well as cash transactions since it is related to the purchases and not to the payment. Main Features:

·        It is allowed by a wholesaler or manufacturer to the retailers at a fixed percentage on the printed price list.

·        It is allowed to the retailers to enable them to make some profit even if they sell the goods at their catalogue price.

·        It is deducted from the invoice.

·        It is not recorded separately in the books of accounts.

·        It is allowed when goods are purchased in a specific quantity.

·        No separate entry is passed for the trade discount, as it is deducted from the cash memo or invoice of the goods.

·        If the goods sold at trade discount are returned by the customer, the amount of trade discount is again deducted from the list price of returned goods.

Cash Discount: When discount is allowed to the customers for making prompt payment, it is called cash discount. It is allowed only if the customer makes the payment within a fixed period. Such discount motivates the customer to make the payment at the earliest. Main Features:

·        It is allowed if the customer makes the payment immediately or within a fixed period.

·        It is allowed to encourage quick or prompt payment.

·        It is not deducted from the invoice.

·        It is recorded separately in the books of accounts.

·        It is allowed when payment is made on or before a specified date.

·        It is allowed at the time of making payment, so the entry for the cash discount is recorded along with the entry for payment.

·        Discount is a nominal account. So it is debited when it is allowed to a customer and credited when it is received.

 

             Sometimes, a customer is allowed both the discounts, i.e. trade discount as well as cash discount. In such a case, first trade discount is to be deducted from the price of the goods and then, cash discount is to be calculated on the balance of the amount.