Q.In the Purchase Book and Sales Book, trade discount shown on the supplier's/customer's invoice is ____.

Trade discount and cash discount are treated very differently in the books, and this question tests exactly that distinction as it applies inside the Purchase/Sales Book.

Trade discount is a reduction a seller allows on the printed list/catalogue price, usually to encourage bulk purchase or as a concession to a class of customer such as a wholesaler. Checking the options:

1. Recorded as a separate income or expense — WRONG. Trade discount never appears anywhere in the books as its own figure; it is only used to reduce the gross/list price before anything is recorded.
2. Deducted before arriving at the taxable value, and never shown separately in the books — CORRECT. The gross (list-price) amount less trade discount gives the taxable value; GST is then computed on that taxable value, and only the taxable value, tax, and net amount ever appear in the Purchase/Sales Book — trade discount itself is only shown as a working/deduction column, not posted anywhere in the ledger.
3. Added to the GST amount before computing tax — WRONG. It is the OPPOSITE: trade discount is deducted from the gross price FIRST, and GST is then computed on the resulting (lower) taxable value, not the other way round. …

A quick way to remember the rule: "Trade discount reduces the PRICE before the entry is made; cash discount is a separate …

Students frequently confuse trade discount with cash discount and try to show trade discount as a separate ledger posting (e.g. crediting a "Trade Discount Account") — no such account exists; …