Types of Discount: Cash Discount and Trade Discount in Subsidiary Book

What is discount?

In simple words, discount is concession or allowance in price.

Discount is given to the buyers to encourage them to make payment in time.

The seller deducts the discount from the gross or total price; it is assumed that the buyer will pay the net amount.

There are different types of discounts.

Out of them, cash discount and trade discount are major in accounting.  

(A) Trade Discount

Trade discount is allowed customers or debtors to encourage them to buy large quantity of goods.

The trade discount amount is adjusted in the invoice itself.

Therefore, it does not need to record in the book of accounts.

Term: 10% trade discount on orders over Rs 20,000.

It means trade discount is allowed at minimum order of Rs 20,000.

If there is total bill of Rs 20,000 or less; discount is not allowed.

If bill is more than Rs 20,000 viz Rs 20,001 or more; discount is allowed on entire amount.  

Term: 20% + 5% discount

It means we should deduct first 20% on total bill.

Additional 5% discount is deducted on remaining bill viz 5% on 80

Trade discount is applied on the list price. 

List price amount also known as price tag. 

The value of trade discount depends on quantity of materials.

Net price = List price – Trade discount.

Keep in Mind (KIM)

(B) Cash Discount

Cash discount is offered by seller to purchaser to receive cash prompt.

Cash discount is only offered on credit sales.

On credit purchase, customers do not pay at the time of purchase but promise to pay latter.

Cash discount is applied on the net price. 

In other words, it is applied after all trade discounts. 

Cash discounts depend on the terms, date methods and the date of payment. 

If there is full settlement or settled; there may be cash discount in the question.

Cash discount = Receivable amount – Cash received.

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Terms of Payment 

There are different terms for cash discount. They are as follows:

Terms 2/10, n/20

Explain:     

The customer will get 2% discount if he pays within 10 days.

Customer must pay net amount within 20 days after sale.

Terms 5/15, 2/30, n/60

Explain:     

The customer will get 5% cash discount if he pays within 15 days;

While he will get 2% cash discount if he pays within 30 days;

Customer must pay net amount within 60 days after sale.

Differences between Trade Discount and Cash Discount

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