Trade Discount: A trade discount is given at the point of sale, reducing the listed price of goods. It is not recorded in the books of accounts directly; only the net amount (after discount) is recorded.
Cash Discount: A cash discount is offered to customers for early payment and is recorded separately in the books of accounts.
Example Scenario
Trade Discount:
- Company A sells goods worth ₹1,00,000 to Company B with a trade discount of 10%.
Cash Discount:
- Company A offers a 5% cash discount if Company B pays within 10 days. Company B pays the amount within the discount period.
Recording Trade Discount
Since the trade discount is not recorded directly in the books, the net sale amount is recorded.
Sale Transaction (After Trade Discount):
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2024 | Accounts Receivable | 90,000 | Recording sales after trade discount | |
| 01-07-2024 | To Sales | 90,000 | Sales of goods |
Explanation:
- Accounts Receivable Account Debit: Increases the receivable account by the net amount (₹1,00,000 – 10% trade discount = ₹90,000).
- To Sales Account Credit: Records the revenue from the sale.
Recording Cash Discount
When Company B pays within the discount period:
Payment Received (with Cash Discount):
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 10-07-2024 | Cash | 85,500 | Cash received after cash discount | |
| 10-07-2024 | Cash Discount Allowed | 4,500 | Recording cash discount allowed | |
| 10-07-2024 | To Accounts Receivable | 90,000 | Clearing the receivable |
Explanation:
- Cash Account Debit: Increases the cash account by the amount received (₹90,000 – 5% cash discount = ₹85,500).
- Cash Discount Allowed Account Debit: Records the expense of the cash discount given (5% of ₹90,000 = ₹4,500).
- To Accounts Receivable Account Credit: Decreases the receivable account by the full amount initially recorded (₹90,000).
Conclusion
Recording trade and cash discounts accurately ensures that sales and receivables are reflected correctly in the financial statements. Trade discounts adjust the sale price at the point of sale, while cash discounts are recorded separately when the payment is made.