Book-Keeping and Accountancy · Ch 3 — Journal
Trade Discount and Cash Discount in Journal Entries
Trade Discount and Cash Discount in Journal Entries
Both trade discount and cash discount reduce the amount a buyer ultimately pays, but they are treated completely differently at the time of journalising — this is one of the most frequently tested distinctions in this chapter.
Trade Discount
A reduction allowed by a seller on the list (catalogue) price of goods, usually to encourage bulk purchase or as an allowance to a particular class of buyer (e.g. a wholesaler). It is deducted from the list price BEFORE the transaction is recorded, and never appears anywhere in the Journal as a separate figure.
Cash Discount
A reduction allowed to a debtor for making payment promptly, usually within an agreed period. Unlike trade discount, cash discount IS recorded separately in the books — as Discount Allowed (an expense, Nominal account) by the party granting it, and as Discount Received (an income, Nominal account) by the party receiving it — because it is a genuine cost/gain of the accounting period, not merely a price adjustment.
| Basis | Trade Discount | Cash Discount |
|---|---|---|
| When allowed | At the time of sale/purchase, on the list price | At the time of payment, for prompt settlement |
| Purpose | To encourage bulk buying or reward a class of buyer | To encourage quick payment and reduce the risk of bad debts |
| Recorded in the Journal? | Never shown separately — deducted before recording | Always shown separately, through Discount Allowed/Received A/c |
| Depends on | Quantity/value of goods bought | Period within which payment is actually made |
| Appears in Trial Balance? | No | Yes |
Worked illustration. Sold goods to Mohan, listed at ₹50,000, allowing a trade discount of 10%. Mohan was further allowed a cash discount of 2% for payment within 7 days, and he paid within that period.
Trade discount = 50,000 × 10% = ₹5,000. The SALE is recorded net of trade discount: 50,000 − 5,000 = ₹45,000.
Entry at the time of sale (on credit):
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| — | Mohan's A/c ....................Dr. To Sales A/c (Being goods sold to Mohan, list price ₹50,000 less 10% trade discount) | 45,000 | 45,000 |
Cash discount is then calculated on the net (post-trade-discount) amount actually owed: 45,000 × 2% = ₹900. Cash actually received = 45,000 − 900 = ₹44,100.
Entry at the time of receipt (within the discount period):
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---:|---:|---:| …
A reduction on the list price of goods, usually for bulk purchase, deducted before recording and never shown separ …
A reduction allowed for prompt payment, recorded separately through Discount Allowed/Discount Received A/c, since it is a genuine expen …