ZIMSEC O Level Principles of Accounts 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 Principles of Accounts Notes.
