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Discounts are allowances given by a trader or manufacturer to another trader or customer to enable or encourage them pay promptly or buy in bulk or earn profits. Discounts can be classified into either:
i. Trade Discount
ii. Quantity Discount
iii. Cash Discount
- Discount Allowed
- Discount received
- Trade Discount
Trade discount is allowance given by a trader to another trader to enable them earn a profit on goods that have low profit margin or have fixed prices.
- Quantity Discount
Quantity discount is allowance given by a trader to encourage bulk purchasing from the customers.
Accounting treatment for Trade and Quantity discounts;
These discounts are shown as a deduction from invoice price and only NET AMOUNT paid or received is treated in the books of accounts.
- Cash Discount
Cash discount is allowance given to encourage buyers or customers to pay promptly within the stipulated period.
Cash discount is further sub-divided into;
(i) DISCOUNT ALLOWED
Discounts allowed are allowances made by a business firm on the amounts receivable from customers so as to encourage prompt payment. The amount for discount allowed is deducted from the sales invoice. This allowance given to debtors and is treated as an EXPENSE.
Accounting treatment for Discount Allowed
When incurred Debit : Discount allowed Account
Credit : Debtors Account/ Accounts Receivable
At year end Debit : Income Statement/ Profit and loss Account
Credit : Discount allowed Account
(ii) DISCOUNT RECEIVED
Discounts received are allowances given by the creditors or suppliers to a business firm to encourage payment of amount due within the agreed time. The amount for discount received is deducted from the invoice price.
This allowance is given by creditors and is treated as INCOME.
Accounting treatment for Discount Received
When earned Debit : Creditors Account/ Account Payable
Credit : Discount received Account
At year end Debit : Discount received Account
Credit : Income Statement/ Profit and loss Account
Kavungya answered the question on August 17, 2021 at 08:45
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