Cash discount and trade discount
is allowed to the parties making prompt payment within the stipulated period of
time or early payment. It is discount allowed (loss) for the creditor and
discount received (gain) for the debtor who makes payment. The discount is
allowed when payment is received or made and hence, the entry for discount is
also passed with the entry of payment. The earlier the payment, the more may be
the discount. Cash discount motivates the debtor to make the payment at an
earlier date to avail discount facility. For example, the terms may be.
“5% discount will be allowed if the payment is made
within one month.
3% discount will be allowed if the payment is made
within two months”.
Discount allowed account will be shown on the debit
side of profit and loss account and discount received account will be shown on
the credit side of profit and loss account. When cash discount is allowed in
respect of sale of goods or services, the seller allows cash discount to the
buyer when payment is made.
discount is a deduction given by the supplier to the buyer on the list price or
catalogue price of the goods. It is given as a trade practice or when goods are
purchased in large quantities. It is shown as a deduction in the invoice. Trade
discount is not recorded in the books of accounts. Only the net amount is
recorded. Example: Suppose the sale of goods for 10,000 was made and 10% was
allowed as trade discount, the entry regarding sales will be made for Rs. 9,000 (10,000 – 10 per
cent of 10,000). In the same way, purchaser of goods will also record purchases
as Rs. 9,000).
Following are the difference between cash discount
and trade discount: