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Journal entries of transactions that involve trade discount and cash discount also follow the double-entry rules.
For a recap on double-entry rules, please click here.
Differences between trade discount and cash discount
Differences between trade discount and cash discount
Please refer to the picture.
Category 7: Purchase of asset involving trade discount, return of asset and payment involving cash discount
Category 7: Purchase of asset involving trade discount, return of asset and payment involving cash discount
During purchase and return, only record the amount after deducting trade discount.
When business pays less than the amount owing to credit supplier, it earns an indirect income known as "Discount Received" (i.e. cash discount).
For Discount Received, always Cr since it is an income account, and it is always in transactions involving Trade Payables. For example,
Dr Trade Payable: <name of supplier> (-L)
Cr Discount Received* (+I)
Cr Cash in hand/ Cash at bank (-A)
*Hint: There are always 3 accounts when payment involves cash discount.
If you cannot remember if you should Dr or Cr "Discount Received", always reserve the 2nd line for "Discount Received" and fill in the amount for it last.
In this way, you will never need to change what you had already written.
Category 8: Sale of inventory involving trade discount, return and payment involving cash discount
Category 8: Sale of inventory involving trade discount, return and payment involving cash discount
During sale and sales return, deduct trade discount from the selling price.
When business receives less than the amount owing by credit customer, it incurs an indirect expense known as "Discount Allowed" (i.e. cash discount).
For Discount Allowed, always Dr since it is an expense account, and it is always in transactions involving Trade Receivables or Other Receivables. For example,
Dr Cash in hand/ Cash at bank (+A)
Dr Discount Allowed* (+E)
Cr Trade Receivable: <name of customer> (-A)
*Hint: There are always 3 accounts when payment involves cash discount.
If you cannot remember if you should Dr or Cr "Discount Allowed", always reserve the 2nd line for "Discount Allowed" and fill in the amount for it last.
In this way, you will never need to change what you had already written.
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