Accountancy · Ch 1 — Introduction to Accounting
Discount
Discount
Discount is simply a reduction in the selling price of goods. It is not a loss or an expense in the true sense — it is a concession given to the buyer. In accounting, the way we record a discount depends entirely on why it is given. There are two distinct types, and they are treated very differently in the books of accounts.
Trade Discount
This is a deduction from the list price (the catalogue price) of goods at the time of the sale itself. It is usually a fixed percentage agreed upon in advance. For example, a manufacturer may offer a 10% trade discount to a wholesaler, and the wholesaler may offer a similar discount to a retailer.
Trade discount is not recorded in the books of accounts at all. The transaction is recorded at the net amount (list price minus trade discount). The discount itself never appears as a separate item in the journal entry or ledger.
Why is it not recorded? Because the sale is effectively made at the discounted price. The list price is just a reference point. The buyer and seller both consider the net price to be the actual transaction value.
Example: Goods with a list price of ₹10,000 are sold at a 10% trade discount.
- Trade discount = 10% of ₹10,000 = ₹1,000
- Net invoice value = ₹10,000 – ₹1,000 = ₹9,000
The journal entry is recorded for ₹9,000 only. The ₹1,000 discount is never mentioned in the entry.
Cash Discount
This is a deduction given to a debtor (a customer who bought on credit) for making prompt payment — that is, paying within a specified period. It is offered at the time of payment, not at the time of sale. Its purpose is to encourage debtors to settle their dues quickly, improving the seller's cash flow.
A common mistake is to confuse trade discount with cash discount. Trade discount is on the price at the time of sale; cash discount is on the amount due at the time of payment. They occur at different points in the transaction cycle.
How is it recorded? Unlike trade discount, cash discount is recorded in the books. It is treated as an expense or a loss for the business that gives it. The logic is simple: the business is sacrificing some of the money it is owed in order to get the rest of it sooner.
Accounting Treatment (for the seller):
When the debtor pays and takes the cash discount, the seller debits the Cash account (for the amount received) and debits the Discount Allowed account (for the amount of the discount). The credit goes to the Debtor's personal account (for the full amount due).
Example: A debtor owes ₹9,000. He is allowed a 2% cash discount if he pays within 10 days. He pays within the period.
- Cash discount = 2% of ₹9,000 = ₹180
- Amount received = ₹9,000 – ₹180 = ₹8,820
The journal entry in the seller's books would be:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| :--- | :--- | :--- | :--- | :--- | …