What is Journal Entry of Discount Account and How to show it?

What is Journal Entry of Discount Account and How to show it in Accounting?

Friends, is the third part of journal entries or how to journal entry of discount account? In fact, you go out in the market, do online shopping and you see big banners of sale sale in many shops or malls. Like – buy one and get another free. In addition, even if you are a merchant, to increase your sales, you must have sold your product lower than other merchants. Friends, this is the discount.

Discount is also given and taken. For example, you negotiate to buy clothes at a shop. The shopkeeper gives you goods at a lower price than other customers. This means that he has sold you clothes at a discount.

Friends, it is loss for discounters. Because he sells for less than the price placed on the items. On the other hand, the discount is beneficial for the recipients because they pay only less than the fair price.

And thus, when the trader is making economic gains and losses. Then it is necessary to include it in the account. So where and how to show the discount in journal entry. Better understand about it.

Now we will talk about the journal entries of Discount.

Friends, you should always keep in mind that there are two types of discounts – Trade discount and Cash discount.

Trade Discount –

This type of discount is for all customers. You minus it by MRP.
It is not shown separately in Book of Account.

Cash Discount –

Cash discount is for those customers who pay in cash.
This will be deduct after the trade discount.
It is show separately in Book of Account.

To understand the discount, look at some transactions.

Friends, a trade discount is a discount that is use in basic trading. In other words, the trader reduces the price of his product to increase the sale.

Now you see the journal entries of those three transaction.

1. Purchased Goods from X 20,000

Purchase a / c Dr. 20,000
To X’s A / c 20,000
(Being goods purchased from X)

Here, the purchase a / c is debit because the rules of real account debit whats come in. On the other hand X’s account is credit, because the rules of personal account are – Credit the giver. In addition, there have been purchases in goods lending because the transaction has a name written on it.

2. Purchased Goods from Y 20,000 @ 5% trade discount.

Purchased A / c Dr. 19,000
To Y’s A / c 19,000
(Being goods purchased from Y trade discount @ 5%)

Friends, here too the rules of real and personal account have been followed. However, purchasing is done at a 5% trade discount. In other words, you purchased goods worth Rs 20,000 for Rs 19,000. Here you do not have to show the profit of 1000 rupees in the entries. Because, this trade discount is offer by the seller to all buyers.

3. Purchased Goods from Z 20,000 @ 5% cash discount.

Purchased A / c Dr. 20,000
To cash A / c 19,000
To Discount received A / c 1,000
(Being cash purchased on 5% cash discount)

Here too the rules of real and personal account have been follow. However, cash discount is not being available here but trade discount. Because the seller has given this offer only to cash discount buyers. In this, the cash account has been credit. Because, no one is name here. Apart from this, the discount is also write on the credit side because you have gained 1000 rupees. Now if you benefit, then you have to show it in the account. If you do not get a discount or buy into a loan, you have to pay Rs 1,000 to the seller.

Now how do you get sale discount in journal entries –

1. Sold Goods to X 20,000

Goods are sold here but cash is not available. Because, goods were sale on credit. Hence the name is write. Hence, Debit the receiver and merchandise has been sold. This meant that goods went out of business. Hence Credit whats goes out.
X’s A / c Dr. 20,000
To Sales A / c 20,000
(Being good sold to X on credit)

2. Sold Goods to Y 20,000 @ 5% trade discount.

Y’s. A / c Dr. 19,000
To Sales A / c 19,000
(Being goods sold to Y on credit @ 5% discount)

Here Y is the receiver and his name is write because, he has bought the goods in borrowed from you. 1000, you lost Rs. Because 5% trade discount is give. And furthermore, the trade discount is not show in the journal entries because, it applies equally to all cash and credit.

On the other hand, a sales account is a credit. Because, as per the rules, credit goes out.

3. Sold Goods to Z 20,000 @ 5% cash discount.

Cash A / c Dr. 19,000
Discount Allowed A / c Dr. 1,000
To Sales A / c 20,000
(Being goods sold on cash discount of 5%)

In this example goods worth 20,000 were sold, but cash was found to be Rs 19,000. Which is written in debit. Apart from this, there was a loss of Rs 1,000 because you have given 5% cash discount in cash sale. It is beneficial to the purchaser, but you suffer loss. According to the rule, all expenses and losses are debited. To sales in discount
Will write as Discount Allowed. In addition, the sales discount must be shown in the journal entries. Because, you have given cash discount.

Friends, while doing a journal entry of discount account in both Sales and Purchase account, always remember not to show trade discount, while cash discount is to be show.