CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - Account for discounts allowed/received - Notes ^{3 / 18}

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.

Finding Net Amount

Trade discounts received or allowed are deducted from the cost of purchases / sales before the sales tax is calculated, as mentioned above.

Finding net value for sales tax after trade discounts

For purchases: List price of purchases - (Trade Discount % x List price) = Net amount

For sales: List price of sales made - (Trade Discount % x List price)= Net amount - net value of sales returns

After this net amount is calculated, then any further calculations for cash discounts and sales tax are based on this net figure

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

Recording Cash Discounts

At the time of purchase, the purchaser will initially record the invoiced amount (net value) of the goods and will then decide whether or not to take advantage of the cash discount, so the transaction will be entered ignoring the cash discount but after adjusting for the trade discount.

• If the discount is not taken, then the transaction is settled as normal.

• If the cash discount is taken, then when the transaction is settled, there will be a balance on payable account for the purchaser and a balance on the receivable account for the seller. 

  This will be settled by the following transactions for the cash discount amount:

  For the purchaser
  Dr Payable 
  Cr Discount received (this will be treated as revenue and transferred to the statement of profit or loss)

  For the seller
  Dr Discount allowed
  Cr Receivable (this will be treated as an expense and transferred to the statement of profit or loss)