CAT / FIA FFA Syllabus D. Recording Transactions And Events - Account for discounts allowed/received - Notes ^{3 / 3}

Account for discounts allowed/Received

A trade discount is a reduction in the amount of money demanded from a customer.

1. Trade discounts received are deducted from the cost of purchases. 

   Cash/settlement discounts received are included as 'other income' of the period.

2. Trade discounts allowed are deducted from the gross sales price, and the net amount is then invoiced to the customer.

Example

Company A purchases inventory on credit from Supplier B at a gross cost of $1,000, and receives a trade discount of 5% from the supplier.

• The double entry for the purchase is as follows:

  DEBIT Inventory $950
  CREDIT Trade payables $950

Example

Company B sells inventory on credit to Customer A at a gross sale price of $100 and
offers a trade discount of 10% to the customer.

• The double entry for the sale is as follows:

  DEBIT Trade receivables $90
  CREDIT Income $90

Note

• If a customer is expected to take up a cash/settlement discount allowed, the discount is deducted from the invoiced amount when recording the revenue for the sale. 

  If the customer subsequently does not take up the discount, the discount is then recorded as revenue.

• If the customer is not expected to take up the discount, the full invoiced amount is recognised as revenue when recording the sale.

   If the customer subsequently does take up the discount, revenue is then reduced by the discount.

In this section, sales tax has been ignored as the interaction of discounts and sales tax will not be tested
in your exam.