distinguish between and account for trade discount and cash discounts

2.3 Books of Prime Entry

Trade Discounts 💼

A trade discount is a reduction in the selling price that a supplier gives to a buyer at the time of purchase. It is not recorded as a separate entry in the books; instead, the purchase is recorded at the net amount after the discount. Think of it as a “price cut” that the buyer gets right away, so the buyer never pays the full listed price.

• It is a non‑cash discount.
• It is applied before the invoice is issued.
• It is not shown as a separate line item in the journal.

Example: A supplier lists a computer for £1,000 but offers a 10% trade discount. The buyer pays £900. The journal entry is:

Cash Discounts 💰

A cash discount is a reduction in the amount payable if the buyer pays within a specified period. Unlike trade discounts, cash discounts are recorded as a separate entry because they affect the cash outflow and the accounts payable balance.

• It is a cash discount.
• It is applied after the invoice is issued.
• It is recorded as a reduction in the accounts payable.

Example: The supplier invoices £900 for the computer. The terms are 2/10, net 30, meaning a 2% discount if paid within 10 days. If the buyer pays on day 8, the discount is £18 (£900 × 0.02). The journal entries are:

Key Differences at a Glance

1. When applied: Trade discount at purchase, cash discount after invoice.
2. Recording: Trade discount is built into the purchase amount; cash discount is a separate entry.
3. Effect on cash: Trade discount reduces the cost but not the cash outflow; cash discount reduces the cash paid.
4. Accounting view: Trade discount → Purchase account; cash discount → Cash Discount Received account.

Quick Quiz 🎓

1. If a supplier offers a 5% trade discount on a £2,000 item, what is the amount recorded in the books?
2. A 3% cash discount is available on a £1,200 invoice. If paid on time, what is the cash outflow?
3. Which discount is recorded as a separate journal entry?