In simple words, discount is a 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.
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.
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)
Formula Net price = List price (1 – Discount rate) N = L (1 − D) |
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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.
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.
Bases |
Trade discount |
Cash discount |
When allowed |
Generally, trade discount is allowed when goods purchased in large quantity. |
Cash discount is allowed when cash is paid in short period of time. |
Purpose |
Trade discount encourages for bigger order (large quantity purchase) |
Cash discount encourages making prompt payment. |
Calculate |
Trade discount is calculated on catalogue price. |
Cash discount is calculated on net amount payable by the buyer. |
Variation in rate |
Trade discount rate is different according to type and quantity of goods purchase. |
Cash discount is different according to period of time. |
Entry in book |
Trade discount does not appear in the books of account. |
Cash discount is recorded in the book of accounts |
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