What is Trade and Cash Discount and How to Journal Entry of its in Purchase and Sales?

What is Trade and Cash Discount and How to Journal Entry of its in Purchase and Sales?

Friends, you will be getting confuse often in trade discount and cash discount. Because, we see it only as a discount. Therefore, we suggest that if you clear it at all, then you will not face any further trouble.
Friends, in the previous article we wrote on some examples based on discounts. Therefore, in this article also we will discuss some different examples based on discount journal entries. Because, if you are a commerce student with information, you will still face such questions. So next we start with what are those questions.

Before battling these questions, I will put the golden rules of accounting in front of you:

Real Account: Debit what comes in
Credit what goes out
Personal Account: Debit the receiver
Credit the giver
Nominal Account: Debit all expenses and losses
Credit all income and gains

We are trying to convince you with examples about Trade and Cash Discount in purchases and sales account. So first you understand Trade and Cash Discount in purchases account:

1. Purchased goods from Mohan Rs.1,50,000 @ 10% trade discount

Purchased A / c Dr. 1,35,000
To Mohan’s A / c 1,35,000
(Being goods purchased from Mohan on 10% trade discount)

Rules of real a / c: Debit what comes in. You have goods coming, so purchase a / c debit happened. You have purchased the goods from Mohan. Because the name is written. This means, you have to purchase on credit. Mohan belongs to a personal account. Therefore, Mohan a / c was entered into the credit account.

You purchased goods worth Rs 1,50,000 from Mohan, but, you only have to pay Rs 1,35,000 because, Mohan was selling goods at a 10% trade discount. Hence a 10% trade discount minus the purchasing price will be shown in the account as trade discount is not shown separately in the account.

2. Returned goods to Mohan at list from MRP Rs. 15,000

Mohan’s A / c Dr. 13,500
To Purchased Returned A/c 13,500
(Being goods returned to Mohan)

Friends, the goods you bought from Mohan. You returned it for some reason. Here you should note that the MRP of the goods you bought was Rs 1,50,000. But, you bought it at a trade discount for Rs 1,35,000 only. Since you returned the goods for15,000. Therefore, you have to debit the goods in the account of Mohan for Rs 13,500 only. In other words, if you have reduced the trade discount in the account during the purchase, it will also have to be diduction while making the return.

The debit will be because Mohan is the receiver. Also, you have returned the goods. This means you have saved expenses and losses. Therefore, the goods will be returned to the credit account. Keep in mind here that if you return the goods, then journal entry name will be Purchase Returned.

3. Paid to Mohan Rs. 1,15,000 in full statement.

Mohan’s A/c Dr. 1,21,500
To Cash A/c 1,15,000
To Discount Received A/c 6,500
(Being paid to Mohan in full settlement)

Friends, it is to be understood here that the discount is not written in your transaction. Why was the discount received written anyway? Understand it properly After the trade discount the price of your purchased goods was Rs. 1,35,000. After that you returned the goods of Rs 13,500. Now you have goods worth Rs 1,21,500 which Mohan had to pay. But, you paid Rs 1,15,000 to Mohan and it got full sattlement. This means that Mohan gave you a discount of Rs 6,500. Thus you received a discount.

According to personal account rules: Debit the receiver. Therefore, here is Mohan receiver, whose account debit. On the other hand, Credit the giver . you paid. Apart from this, you also get a discount. Since, discount receive is beneficial for you. Therefore, under nominal account it is under incomes or gains. Hence, it was entery into the credit account.

So friends, I hope that you have got a better understanding of the discounts related to purchases.

Now let’s talk about the discount related to sales.

4. Sold goods to Vinay of less price 2,00,000 @ 10% trade discount.

Vinay’s A / c Dr. 1,80,000
To Sales A / c 1,80,000
(Being goods sold to Vinay @ 10% trade discount)

Now, if the name is not written here, there will be no cash payment. Because, Debit what comes in. Hence Vinay’s account will be debit. On the other hand, sales account will be credit because credit is under all incomes gains.

Since, you have sold the goods at a 10% trade discount. Therefore, only 10% of the price of the goods will be entered into the account. Because the trade discount should not appear in the account.

5. Vinay returned goods less price 10,000

Sales Returned A/c Dr. 9,000
To Vinay’s A/c 9,000
(Being Goods returned by Vinay)

Debit all expenses and losses, according to nominal accounting rules. Therefore, the Sales Returned A / c will be debit. Because, returning the goods sold is your loss. On the other hand, in the personal account – Credit the giver. The giver here is Vinay. Therefore it was entry on the credit side.

Now, because you sold the goods at a 10% trade discount. Therefore, only the amount of sales return will be deduction by 10% on 10,000 MRP.

6. Received from Vinay the amount due from him under cash discount of 10%.

Cash A / c Dr. 1,53,900
Discount Allowed A / c Dr. 17,100
To To Vinay’s A / c 1,71,000
(Cash received from Vinay on cash discount 10%)

Friends, Debit what comes in real account. What’s coming here – cash. Hence the cash debit occurred. Apart from this, the discount account is also debit because as per the rules of Nominal a / c, Debit all expenses and losses happen. On the other hand, the cash discount is accounted for and is required to be reflect in the account.

Read more articles: Purchases and Sales Journal EntriesJournal Entries and its Rules Accounting and its Feature, Function, Objectives and Requirements, Journal Entry of Discount Account

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