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(22)-ACCOUNTING FOR DISCOUNTS

Sunday, November 8, 2009

Accounting for Discounts

A discount is a reduction in the price of goods below the amount at which those goods would normally be sold to other customers of the supplier. Discounts can identified as two parts,
  1. Trade Discounts – Trade discounts is a reduction in the catalogue price of an article, given by a wholesaler or manufacturer to a retailer. It is often given in return for bulk purchase orders.
  2. Cash Discounts or settlement discounts – Cash discounts is a reduction in the amount payable for the purchase of goods or services in return for payment in cash rather than taking credit.


Trade Discounts

This is a reduction in the cost of goods owing to the nature of the trading transaction. For example a customer might quoted a price 2$ per unit for a particular item, but lower price of say 0.5$ per unit if the item is bought in quantities of say 200 units or more at a time.

In an accounting trade discounts are recorded in only to the day books, its not transfer to journal.

Cash Discounts or Settlement Discounts

This is a reduction in the amount payable to the supplier, in return for immediate payment in cash, rather than purchase on credit. For example a suppler might charge 2000$ for goods, but offer a discount of, say 10% if the goods are paid for immediately in cash.

In an accounting trade discounts are recorded in cash book first and transfer it into journal.

Trade discounts received

It should be deducted from the gross cost of purchase. It’s recorded as shown below

  • Total creditors (Debit)
  • Discounts received (Credit)
  • Cash account (Credit)

At the end of the accounting period discounts received account is transfer to the profit and loss account

  • Discounts received (Debit)
  • Profit and loss account (Credit)

Trade discounts allowed

It should be deducted from the gross sales price. It’s recorded as shown below

  • Cash account (Debit)
  • Discounts allowed (Debit)
  • Total debtors (Credit)

At the end of the accounting period discounts allowed account is transfer to the profit and loss account

  • Profit and loss account (Debit)
  • Discounts received (Credit)

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