Question

Esplain how a sale would be recorded with a discount on the seller's books example. (two journals). Give an

Answer 1

Answer :

There are two types of Discounts that can be given at the time of sale :

• Trade Discount :

              Trade discount are not shown in books of account but shown in Invoice. This discount is    

              given by whole seller or Manufacturer to retailer at a fix percentage on listed price of goods.

• Cash Discount :

This Discount is given to Customer for early payments .This discount is recorded in Books of accounts at the time of payment by customer

Let’s take an Example to understand better :

Jignesh Traders sold goods on Credit to Ramesh Traders Rahim for $ 4500 with trade discount allowed by Jignesh traders is 10%. Ramesh Traders made 60% of the payment immediately and received 2% cash discount.

In the given transaction :

First of all we have to understand the meaning of transaction in which Jignesh Traders sale goods to ramesh Traders after 20% trade discount which will be calculated like

$ 4500 x 10% which will be $ 4050

now goods are sold for rupees $ 4050 only because trade discount is first of all deducted in the transaction

Now out of this $ 4050 received 60% of payment immediately which is calculated like this :

$ 4050 x 60% = $ 2430 therefore cash discount need to be calculated on this $ 2430 which is

$ 2430 x 2% = $ 48.60

now out of $ 4050

cash payment after cash discount is $ 2430 - $ 48.60 = 2381.40

and credit sales to ramesh Traders is $ 4050* 40% = $ 1620

Here we keep in mind that cash discount is allowed on cash payment or receipt only and in the above case cash payment is only 60% and discount on it is 2% which comes to $ 2430-$ 48.60 = 2381.40

Now

Journal Entry in the books of Jignesh Traders ( i.e. Seller ) In this case will be:

Cash	$ 2381.40
Discount Given	$ 48.60
Ramesh Traders	$ 1620
To Sales		$ 4050

When Balance Money Received from Ramesh Traders

Journal Entry will be:

Cash / Bank   dr	$ 1620
To Ramesh Trders		$1620