Cash Discounts
“A cash discount is a reduction in price given to customers who pay their bills promptly, either by cash, cheque or other means”.
Example
A customer might be given a 10 % discount if payment is made within 7 days.
The rate of cash discount is usually stated as a percentage. The period within the payment is to be made; these are all recorded on the sales documents (invoices).
Discount Allowed
Cash discounts are given to customers who pay their bills promptly.
Discount Received
Cash discounts received from suppliers who reward prompt payment.
Note: cash discounts are recorded in their own ledger accounts.
Trade Discount
“A Trade Discount is a reduction in the list price of goods, given to trade customers. This can be two tiered, there might be a price for the general public and a 10% discount for traders who buy in bulk”.
There normally three types of customers:
1. Traders who buy a lot of goods from you.
2. Traders who buy only a few items from you.
3. Direct to the general public.
When recording credit sales, any trade discount is shown on the sales invoice.
Note: No double entry for Trade Discounts. These do not go in the accounts.
Things to remember
Cash discount is always shown in double entry accounts.
Trade discount is never shown in double entry accounts.