Basic Bookkeeping Online Guide » r. Trading & P&L Items

Trade & Cash Discount

slang — Thu, 18 Oct 2007 10:26:56 +0000

To keep proper books of account, the bookkeeper needs to at least understand the difference between Trade and Cash discounts.

Cash discount, which are shown as Discount Allowed(given to customers) and Discount Received(received from suppliers) are shown below with the accounting treatment.

Trade Discount

A manufacturer or trade normally issue a price list of their products at which the customers usually have to pay.The allowance given from the list price is called trade discount.When a wholesaler buys from a manufacturer, the trade discount/allowance given will be higher than the allowance normally when a retailer buy from the wholesaler.As the word ”trade”, the discount/allowance given is meant for higher/bulk purchase of goods and services.

Cash Discount

Cash discount is an allowance for prompt payment and is based on the Net Price List;

An allowance given to Customers is known as Discount Allowed and

An allowance made by creditors off the amount owing is called Discount Received.

Salient Points:

List price is the original price list of the manufacturer/trade which is before any allowance where trade or cash discount is given;

List price after trade discount given is called Net price;

Using this Net price, cash discount is computed.

TRADE discount is to do with the bulk/volume discount due to higher volume of purchases of goods and services from the company’s suppliers whilst CASH discount is to do with discount given for prompt payment;

Where both a trade and a cash discount is given namely say a company buys large amount of goods and promise to pay to the supplier very promptly, the company can enjoy both the trade and cash discount. However, the trade and cash discount need to be calculated separately with the trade discount first followed by the cash discount.

Accounting Treatment of Discounts:

Illustration:

Company A’s book have the following transactions relating to discounts:

2/03/06 Received from Mr ABC $2,900, discount allowed by Company A is $100

3/4/06 Paid to Supplier XYZ $4,900, discount received from XYZ is $100

Accounting entry for discount allowed:

Debit: Discount Allowed (Income statement) $ 100

Debit: Bank a/c $2,900

Credit : Accounts Receivable-Mr. ABC $3,000

Being discount allowed of $100 to customer Mr ABC for prompt payment.

Accounting entry for discount received:

Debit: A/c Payable-XYZ $5,000

Credit: Discount Received ( Income Statement) $100

Credit: Bank a/c $4,900

Being discount received from supplier Company XYZ for $100

Carriage Inwards Versus Carriage Outwards

slang — Thu, 18 Oct 2007 10:26:09 +0000

We often see the term carriage inwards and carriage outwards. As bookkeeper, we must clearly understand the difference and use the following appropriate accounting treatment.

Carriage Inwards:

The transport costs of goods received by a company.

Accounting Treatment:

Should be taken up in the Purchases figures as it is part of the cost of the goods being purchased.

Carriage Outwards:

The transport costs of company’s goods to its customers.

Accounting Treatment:

Should be taken up as expenses in the Income Statement.

Return Inwards Versus Return Outwards

slang — Thu, 18 Oct 2007 10:25:10 +0000

Similarly like carriages inwards & outwards, we have such common terms like return inwards and return outwards. As reiterated, it is crucial to understand the term and treat the items using the appropriate accounting treatment.

Return Inwards:

Goods already sold by the company were returned to the business by the customers sometimes later.

Goods can be defective, not according to specification or damage.

When goods are returned by customers, the company issue a credit note to the customer.

Accounting Treatment:

Debit: Return Inwards Account

Credit: Customer’s Account

In the Income Statement:

Sales XXX

Less: Return inwards (x)

Net Sales YYY

Return Outwards:

Goods purchased from the suppliers and subsequently return to the suppliers .

Goods outwards maybe due to wrong quality, damage, wrong specification, etc

In this case when goods are returned to suppliers, credit notes will be received from the suppliers.

Accounting Treatment:

Debit: Creditor Account

Credit: Return Outwards A/c

The Return Outward a/c will be debited to the Purchases account to reduce the amount as lesser value of goods are received as a result of the return of goods to the suppliers.