Trade and Cash Discounts

Cash and Trade Discounts

Cash Discounts

“A cash discount is a reduction in price given to customers who pay their bills promptly, either by cash, cheque or other means”.

Example

A customer might be given a 10 % discount if payment is made within 7 days.

The rate of cash discount is usually stated as a percentage.  The period within the payment is to be made; these are all recorded on the sales documents (invoices).

Discount Allowed

Cash discounts are given to customers who pay their bills promptly.

Discount Received

Cash discounts received from suppliers who reward prompt payment.

Note: cash discounts are recorded in their own ledger accounts.

Example One                          (Discount Allowed)

W Clarke owed us £100. He pays on 2 September 2002 by cash within the time limit applicable for a 5% cash discount.  He will pay £100 - £5 = £95 in full settlement of his account.

Effect	Action
Of Cash: Cash is increased by £95. Asset of debtors is decreased by £95.	Debit cash discount, i.e. enter £95 in debit column of Cash Book. Credit W Clarke £95.
Of Discounts: Asset of debtors is decreased by £5. (After the cash was paid there remained a balance of £5. As the account has been paid, this asset must be cancelled.) Expenses of discounts allowed increased by £5.	Credit W Clarke £ 5. Debit discounts allowed account £5.

Example Two                          (Discount Received)

The business owed S Small £400. It pays him on 3 September 2002 by cheque within the time limit down by him for 2½% cash discount.  The business will pay £400 - £10 = £390 in full settlement of the account.

Effect	Action
Of cheque: Asset of bank is reduced by £390. Liability of creditors is reduced by £390.	Credit bank, i.e. entry in the credit bank column for £390.   Debit S Small’s account £390.
Of discounts: Liability of creditors is reduced by £10. (After the cheque was paid, a balance of £10 remained.  As the account has been paid the liability must be cancelled.) Revenues of discounts received increased by £10.	Debit S Small’s account £10. Credit discounts received account £10.

Cash Book

2002 Sept 2 W Clarke

Cash £ 95

Bank £

2002 Sept 3 S Small

Cash £

Bank £ 390

Discount Allowed

2002 Sept 2 W Clarke

£ 5

Discount Received

2002 Sept 3 S Small

£ 10

W Clarke                                 (Sales Ledger)

2002 Sept 1 Balance

£ 100     100

2002 Sept 2 Cash Sept 2 Discount

£ 95 5 100

S Small                                    (Purchases Ledger)

2002 Sept 3 Bank Sept 3 Discount

£ 390 10 400

2002 Sept 1 Balance

£ 400 400

Note: It is the accounting custom to enter the word ‘Discount’ in the personal accounts without stating whether it is a discount allowed or discount received.

Walkthrough exercise 1:

Using the information provided complete the cash discounts for these two scenarios:

Mrs Green owed us £200.  She pays on 12 October 2003 by cheque within the time limit at a 10%for cash discount.

She will pay £200 - £20 = £180 in full settlement of her account.

The business owed Mr Brown £500. It pays him on 15 October 2003 by cash within the negotiated time limit for 5% discount.  The business will pay £500 - £25 = £450 in full settlement of the account.

Discount Columns in the Cash Book.

An extra column is added on each side of the Cash Book in which the amounts of discount are entered.  Discount allowed in the discounts column on the debit side of the Cash Book.

Discount received is entered on the discount column on the credit side of the Cash Book.

Cash Book

2002 Sept 2 W Clarke

Discount £ 5

Cash £ 95

Bank £

2002 Sept 3 S Small

Discount £ 10

Cash £

Bank £ 390

When making entries in the discount accounts of the General Ledger it is important to remember:

Total of discounts column      

on receipts side of the                        Enter on debit side of discounts

Cash Book                                         allowed account.

Total of discounts column

on payments side of the                    Enter on credit side of discounts

Cash Book                                         received account.

Trade Discount

“A Trade Discount is a reduction in the list price of goods, given to trade customers. This can be two tiered, there might be a price for the general public and a 10% discount for traders who buy in bulk”.

There normally three types of customers:-

1. Traders who buy a lot of goods from you.
2. Traders who buy only a few items from you.
3. Direct to the general public.

This means that your selling price is at three levels:

                                                Trader 1     Trader 2     General Public

                                                   £                 £                 £

Basic Price                                 200             200             200

Less Trade Discount       (25%)   (50)    (20%) (40)             nil

                                                  150             160              200

A company that is known to have several trade customers is

B&Q.

When recording credit sales, any trade discount is shown on the sales invoice.

Note: No double entry for Trade Discounts.  These do not go in the accounts.

Things to remember

Cash discount is always shown in double entry accounts.

Trade discount is never shown in double entry accounts.