Discount!! Sale!! Offer!!These words excite every person regardless of age, sex, and colour. Discount is a very common term in businesses too. Discounts are offered by businesses to attract potential customers and induce them to buy more products. Discount is one of the easiest ways used by various traders, businessmen, and shopkeepers all around the world to increase sales and boost profit. Discount simply means a reduction in the selling price of the goods. Anytime you tell a customer that he can save money, you’re likely to get his attention. Discounts
don’t just help customers but they helpbusinesses too. From increased sales to improved reputation business success can be greatly influenced by this one factor called Discount which is seldom taken seriously.
In Accounting or Business parlance, 2 forms of Discounts are common. Trade Discount and Cash Discount.
Let us analyse what these discounts mean and how they differ from each other.
A trade discount is one that is allowed by the wholesaler to the retailer, calculated on the list price of the product, whereas cash discount is allowed to stimulate instant payment of the goods purchased. The main intention of offering Trade Discount is to facilitate a bulk sales and the main objective of cash discount is to facilitate a prompt payment. It is important to note that Trade discount is never shown separately in the books of accounts as it is shown in invoice as a deduction itself. But when Cash discount is shown it is shown separately in the books as an expense in the Profit and Loss A/c. Another point of difference is Trade discount is allowed on both credit and cash transactions but Cash Discount is allowed only on Cash transactions.
Let us understand the concept of Trade Discount and Cash Discount with an example
ABC Computers LLC sold 10 Laptops to its Customer with a 5% Trade Discount on the list price of AED 3,000 each. ABC Computers LLC in addition extended a cash discount of 2% 10 Net 30 days.
Total List Price = 10*3,000 = AED 30,000
Total Discount = 30,000*5% = AED 1,500
Final Invoice Price after Trade Discount = AED 30,000 – AED 1,500 = AED 28,500
Invoice Price = AED 28,500
2% of AED 28,500 = AED 570
Net amount to be paid within 10 days = AED 28,500 – AED 570 = AED 27,930
The accounting entry in the books of ABC Computers LLC will be:
Customer’s Account Dr. 28,500 Trade Discount
To Sales Account 28,500
Cash Account Dr. 27,930 Cash Discount
Discount allowed Account 570
To Sales Account 28,500