Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Trade Discount
- Generally most businesses especially wholesalers and manufacturers have three types of customers:
- The General Public who buy only a few items
- Traders who only buy a few items
- Traders a large number of goods
- Traders have to eventually sell to their own customers in their own areas for example some grocery shops buy from towns and sell in their rural areas
- They will likely want to pay a lower price in order for them to be able to make a profit
- Also the traders who buy in large quantities will unlikely want to pay as much as those customers who buy only small quantities
- This results in sellers offering trade discount to customers who are traders
- Trade discount is defined as a discount on the retail price of something allowed or agreed between traders or allowed to a retailer by a wholesaler
- The seller has one displayed price but traders are given a discount on this price which results in them paying less
- When a business is offered trade discount when making purchases the business ends up paying less than the listed price
- However since trade discount is a way for sellers to calculate different prices for different buyers it does not affect what is recorded in the books of the purchasing business
- Accounting concepts dictate that we only record in our books what we have actually paid
- Trade discount is not included in the double entry recording of a transaction
- Trade discount is not to be confused with Cash Discount (Discount Received and Discount Allowed)
- Cash Discount is recorded as part of double entry
- Trade discount is not recorded as part of double entry
P Mukono is a trader who owns a small grocery shop at Honde Green shopping center. He purchases his goods from Mohammed Mussa wholesalers in Harare which offers a Trade Discount of 10%. During the month he makes the following purchases:
- 1 Jan purchases goods worth $3 000 on credit from Mohammed Mussa
- 15 Jan purchases goods worth 8 000 cash from Mohammed Mussa
- 30 Jan pays up the amount owing to Mohammed Mussa using an RTGS transfer and receives a cash discount of $50
Required:
- Show the accounting entries to record the transactions above for the month of January
- Distinguish between trade discount and cash discount
1)
| Purchases(Creditor's) Ledger | ||||||||
| DR | M Mussa Account | CR | ||||||
| Date | Details | Amount($) | Date | Details | Amount($) | |||
| 30 Jan | Bank | 2650 | 1 Jan | Purchases | 2700 | |||
| 30 Jan | Discount | 50 | ||||||
2700 | 2700 | |||||||
| DR | Cash Book | CR | ||||||
| Date | Details | Cash($) | Bank($) | Date | Details | Cash($) | Bank($) | |
| 1 Jan | Balance b/d | 11000 | 10000 | 15 Jan | Purchases | 7200 | ||
| 30 Jan | M Mussa | 2650 | ||||||
| 31 Jan | Balance c/d | 3800 | 7350 | |||||
11000 | 10000 | 11000 | 10000 |
|||||
| General Ledger | ||||||||
| DR | Purchases Account | CR | ||||||
| Date | Details | Amount($) | Date | Details | Amount($) | |||
| 1 Jan | M Mussa | 2700 | ||||||
| 15 Jan | Cash | 7200 | ||||||
| DR | Discount Received Account | CR | ||||||
| Date | Details | Amount($) | Date | Details | Amount($) | |||
| 30 Jan | M Mussa | 50 |
As you can see we record Cash Discount but we do not record Trade Discount in the books
2) Differences between Trade Discount and Cash Discount
| Cash Discount | Trade Discount |
|---|---|
| Is offered to customers who pay early or in time | Is offered by traders to other traders |
| It is meant to encourage customers to pay promptly | Is meant to allow fellow traders to make a profit |
| It is part of the double entry system | Is not recorded on the books |
| It is not shown on invoices | Is shown on the invoice as a deduction |
| Varies with time | Varies with quantity of goods purchased |
- If both Cash Discount and Trade Discount are given as percentages Cash Discount is applied after Trade Discount has been deducted
To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.
