Here is find out details wise with example trade discount journal entry. trade discount is a reduction in the listed price of goods or services offered by a seller to a buyer, usually based on the volume or value of the purchase. Trade discounts are typically not recorded separately in the books of accounts as they are deducted directly from the invoice price. However, it’s important to understand how to record the transactions involving trade discounts correctly.
Key Points
- Trade Discount: A reduction on the catalog or list price of goods granted to the buyer.
- Not Recorded Separately: Trade discounts are usually not recorded separately in the accounting books. They are deducted from the invoice price, and the net amount is recorded.
Trade Discount Journal Entry
Scenario: Goods Sold with Trade Discount
Example: On 01-08-2023, a business sells goods worth ₹200,000 with a trade discount of 10% to a customer on credit.
- Calculate the Trade Discount:
- Trade Discount = 10% of ₹200,000 = ₹20,000
- Net Sales Amount = ₹200,000 – ₹20,000 = ₹180,000
- Journal Entry:
- Accounts Receivable is debited with the net sales amount.
- Sales Revenue is credited with the net sales amount.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Accounts Receivable | 180,000 | Record sales with trade discount | |
| 01-08-2023 | To Sales Revenue | 180,000 | Sales made to customer |
Example Without Trade Discount
For comparison, if there was no trade discount, the journal entry for the sale would be as follows:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2023 | Accounts Receivable | 200,000 | Record sales without trade discount | |
| 01-08-2023 | To Sales Revenue | 200,000 | Sales made to customer |
Additional Examples
1. Purchase of Goods with Trade Discount
Example: On 15-08-2023, a business purchases goods worth ₹100,000 with a trade discount of 5% on credit.
- Calculate the Trade Discount:
- Trade Discount = 5% of ₹100,000 = ₹5,000
- Net Purchase Amount = ₹100,000 – ₹5,000 = ₹95,000
- Journal Entry:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-08-2023 | Purchases | 95,000 | Record purchase with trade discount | |
| 15-08-2023 | To Accounts Payable | 95,000 | Goods purchased on credit |
2. Cash Purchase with Trade Discount
Example: On 20-08-2023, a business purchases goods worth ₹50,000 with a trade discount of 10% and pays in cash.
- Calculate the Trade Discount:
- Trade Discount = 10% of ₹50,000 = ₹5,000
- Net Purchase Amount = ₹50,000 – ₹5,000 = ₹45,000
- Journal Entry:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 20-08-2023 | Purchases | 45,000 | Record cash purchase with trade discount | |
| 20-08-2023 | To Cash | 45,000 | Payment for goods purchased |
Conclusion
Trade discounts are not recorded separately in accounting records. Instead, they are deducted from the gross amount of the invoice, and only the net amount is recorded in the books. Understanding how to handle trade discounts correctly ensures accurate financial reporting and helps maintain clarity in financial transactions.