What is Journal Entry of Cash and Trade Discount
what are Journal Entry of Cash and Trade Discount some time cash and trade discount are allowed to a customer in one transaction only under such transaction we have to understand the basic concept of trade and cash discount before recording the journal entry?
Example 1: Avinash traders sold goods to Manish trader Rs 20,000 and trade discount Rs 10%.
here to calculate Trade discount =
20,000 X 10/100 = 2000
Now deduct trade discount from total sale amount = 20,000 – 2000 = 18000
Journal entry for the same will be in the book of Avinash traders is
Manish Dr 18000
To Sale A/c 18000
(being goods sold to Manish and TD have given)
Note: Trade discount is not shown in the books of accounts.
Journal entry for the same will be in the book of Manish traders is
Purchase A/c Dr. 18000
To Avinash 18.000
(being goods purchased form Avinash and TD received 10%)
Purchase goods form Akash on 1/4/16 Rs 10000 and he gives us Cash discount @ 5% if payment is made within 3 days
paid Cash to Akash on 2/4/16.
Purchase A/c Dr. 10000
To Akash 10000
(being goods purchased form Akash)
To Cash A/c dr 9500
To Discount Received A/c Dr 500
(being cash paid to Akash and received cash
Ram purchased goods on Credit from Rahim Rs 20000 with trade discount allowed by Rahim is 10%. Rahim made 60% of the payment immediately and received 2% cash discount.
In the given transaction, first of all, we have to understand the meaning of a transaction in which ram sale goods to Rahim after 20% trade discount which will be calculated like
20000 x 10% which will be Rs. 2000.
now goods are sold for rupees 18000 only because the trade discount is first of all deducted in the transaction
Now out of this Rs 18000 received 60% of payment immediately which is calculated like this :
18000x 60% = 10800, therefore, cash discount need to be calculated on this 10800 which is
10,800 x 2% = 216
now out of 18000
cash payment after cash discount is 10800-216 = 10584
and credit purchased from Rahim is 10800 – 216-10584=7200
Here one thing keep in mind that cash discount is allowed on cash payment or receipt only and in the above case cash payment is only 60% and discount on it is 2% which comes to 10800 – 216 = 10584
now a journal entry, in this case, will be
Purchase A/c Dr 18000
To Cash A/c 10584
To Discount received A/c 216
To Rahim 7200
(Being cash paid and discount received from ram)
Point to be noted in trade discount and cash discount :
- Trade discount is not given while selling of goods by the whole seller to the retailer in order to increase the sale of goods whereas cash discount is given in order to have prompt or quick payment of money received from its customer.
- Trade discount is not shown in the books of accounts whereas the cash discount is shown in the books of accounts.
- trade discount is shown in the invoice whereas cash discount is not shown in the invoice. Trade discount = this discount is alluded by whole seller or manufacturer to the retailer at a fixed percentage on the listed price of goods it is allowed when goods are purchased in blunt large capacity. This discount is allowed when goods well as cash transaction since it is related to the purchased and not to these payments no separate entry is passed for the trade discount as it is deducted from the cash memo or invoice of the goods
- Cash discount
- this discount is allowed to the customer for making prompt or early payments in the other words, the cash discount is allowed only if they’re the customer makes the payments within the fixed period.
- such discount motivated the customer to make the payments earliest. such as discount is allowed at the time of making payments so so the entry for cash discounts is recorded along with the entry for payments discounts is a nominal account and as such it is debited when it is allowed to a customer are credited when it is perceived.
- An advantage of trade discount. It is reduced the cost of purchased and thus increased the margin of profit. It retailer to make some profit even if he sells the goods at their catalogue price
- The advantage of cash discount. Seller received the amount within a stipulated time because cash discount is allowed only if they’re the customer makes the payments within the specified period. To the buyer
- The earlier the buyer pays the highest he earns in cash discounts.
- A buyer s who earns higher cash discounts can sell the goods to his customer lower rates.
- Early payments enhancements the reputation or goodwill of the buyer.To the whole seller
- It increased sales by encouraging retailers to make bulk purchased
- Change the rate of trade discount may prove to be an effective weapon to face completion. Change in the rate of trade discounts is an easy method to make changes in prices without repairing of the catalogue.
|Trade Discount||Cash Discount|
|Trade discount is discount provided on the bulk sale of purchase of Goods on a list price||Cash discount is discount provided on cash or bank receipt or payment|
|It is not shown in the books of accounts||It is shown in the books of account|
|The objective of the trade discount is then the retailer can make some profit if he sells goods on MRP||It objective is to get prompt payment form the party by providing him with some rebate|
|It increases the sale of goods for wholesaler||It helps to get payment on the due date or before the due date|
|It is shown in the invoice||It is generally not shown in the invoice|
|When we purchase goods trade discount is received and when we sold goods trade discount is allowed||When we sell goods and received cash we allowed a cash discount when we purchase goods and paid cash then cash discount is received|
Purchase goods form Sheetal trader Rs 10000 and trade discount received 10%
Journal entry will be :
Purchase A/c Dr. 9000
To Sheetal Trader A/c 9000
(being trade discount received )
In the above entry, trade is not shown in the books of accounts.