There are many differences between trade and cash discounts. A trade discount is used to encourage more sales whereas a cash discount is used to encourage prompt payment of invoices.
Net Purchases in Accounting
Net purchases is equal to the gross purchases of goods from suppliers less the amount of purchase returns, allowances, and discounts. To arrive at the total cost of goods purchased the business needs to add the cost of freight-in needed to deliver the goods to their present location and condition ready for sale to customers.
Purchase Discount in Accounting
Purchase discounts are shown in the income statement and are recorded in a contra expense account and offset against the gross purchases of the business.
Sales Discount in Accounting
Sales discounts are an expense to a business. They are recorded in the sales discounts account, a contra revenue account offset against the gross revenue of the business.
Chain Discount Calculator
The chain discount calculator works out a products net price after applying multiple trade discounts to its list price. This free Excel calculator also provides a summary showing the original price, total discount, and net price, together with a calculation of the single equivalent rate (SED).
Chain Discounts in Accounting
Chain discounts are sometimes called multiple discounts, and refer to a of discounts which are applied to an original selling price (list price) to arrive at a net sales price. The discounts are applied in sequence and are calculated using the series discount formula.
Cash Discount Received
A business has been invoiced 500 for goods and takes a 2% cash settlement discount for early payment.
The original invoice would have been posted to accounts payable, so the balance before settlement on the suppliers account is 500. A 2% discount on 500 is 10, and the amount of cash the customer pays is therefore 490.
As a trade discount is deducted before any exchange takes place with the customer, it does not form part of the accounting transaction, and is not entered into the accounting records of the business.
Credit Note for Discount Allowed
When a customer is given an invoice discount, a credit note needs to be issued to the customer to adjust the balance on the accounts receivable and to record the discount allowed in the income statement.
A customer has been invoiced 100 for goods and takes a 5% cash settle discount for early payment.
The original invoice would have been posted to the debtors control, so the balance before settlement on the customers account is 100. A 5% discount on 100 is 5, and the amount of cash the customer pays is 95.