What is the Difference Between Trade Discount and Cash Discount?



TRADE DISCOUNTS

TRADE DISCOUNTS encourage the buyers to purchase products because of markdowns directly deducted from the list price, also called the catalog price. There is no separate trade discount account and there is also no accounting entry to be recorded for this discount. Instead, all accounting entries are based on the invoice price which is obtained by subtracting the trade discount from the list price/catalog price.

Trade Discount Sample Problem

Ruthie Technologies quoted a list price of P15000 for each portable DVD player, less at trade discount of 15%. If Meriam Company ordered 8 units, how much would be the invoice price?

Solution:

 

Trade discount

Trade discounts can be also  stated in a series. Assume instead that the discount given by the Ruthie Tech. to Meriam Co. is 15% and 10%, what would be the computation of the invoice price?

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trade discount

Note that the trade discounts are not journalized.




CASH DISCOUNT

CASH DISCOUNT from the buyer’s viewpoint are called purchase discounts and sales discounts from the seller’s point of view. Its primary purpose is to encourage prompt payment for purchases of merchandise on account. It is designated by such notation as “2/10” which means the buyer may avail of a 2% discount if the invoice is paid within 10 days from the invoice date. In this case 10 days is called the discount period, the period covered by the discount.

Cash discount is computed on the net amount after the trade discount. Cash Discounts are deducted from the invoice price if the payment is made by the buyer within the discount period.

Cash discounts are recorded in the books as sales discount by the seller and as purchase discount by the buyer. Sales discounts are deducted from sale to determine net sales while purchases discounts are deducted from purchases to determine the net purchases.

Cash Discount Sample Problem

Meriam Company ordered 8 units of portable DVD player from Ruthie Tech. The invoice price costs P91,800 with credit terms of 4/10, n/30. The computation for the amount to be paid or collected within the discount period would be as follows:

Cash discount

Journal Entries for Cash Discounts

The entry to record for the cash discount or called the sales discounts in the seller's book would be:

cash discount

The entry to record for the cash discount or called the purchases discounts in the buyer's book would be:

cash discount

If the payment is made after the discount period of 10 days (4/10) and within the credit period of 30 days (n/30) the entry to record would be:

cash discount