what is discount

*Discount

*An amount or rate by which the catalog, list, or retail price of an item 

is reduced when sold to a re-seller.

*A discount specifically refers to terms which is used when goods are sold at a less than its nominal or par value.

*At a discount also refers to stocks or other securities that are sold below the present market value, similar to a sale on goods at a retail establishment.


*Discounts may be offered on sales of goods to attract buyers. Discounts may be classified into two types:

Trade Discounts: 

*A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a re-seller, rather than to the end customer

*it is offered at the time of purchase for example when goods are purchased in bulk or to retain loyal customers.

Note:Trade discounts are generally ignored for accounting purposes in that they are omitted from accounting records.

Therefore, sales, along with any receivables in the case of a credit sale, are recorded net of any trade discounts offered.

Example:

Bike LTD as part of its sales promotion campaign has offered to sell their bikes at a 10% trade discount on their listed price of $100.

Sales will be recorded net of trade discount, i.e. $90 per bike.

Effect:

*The trade discount reflects the re-seller's profit margin and usually 

varies directly with the quantity of the item being purchased.

*Cash/settlement Discount: 

*it is offered to customers as an incentive for timely payment of their liabilities in respect of credit purchases.

*it is given to those customer who make payment delay

*A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to motivate the customer to pay within a specified tim

Cash discounts result in the reduction of sales revenue earned during the period. However, not all customers may qualify for the cash discount. It is therefore necessary to record the initial sale at the gross amount (after deducting any trade discounts!) and subsequently decreasing the sale revenue by the amount of discount that is actually allowed.

Following double entry is required to record the cash discount:

Debit	Discount Allowed (increase expense))
Credit	Receivable (decrease receivable)

Debiting discount allowed would result reducing gross sales revenue by the amount of cash discount allowed. 

Consequently, receivables are credited to reduce their balance to the amount that is expected to be recovered from them, i.e. net of cash discount.

Example:

Bike LTD as part of its sales promotion campaign has offered to sell their bikes at a 10% discount on their listed price of $100. If customers pay within 10 days from the date of purchase, they get a further $5 cash discount. Bike LTD sells a bike to XYZ who pays within 10 days.

Before we proceed with the accounting entries, first it is necessary to distinguish between the two types of discounts being offered by Bike LTD. 

The 10% discount is a trade discount and should therefore not appear in Bike LTD's accounting records. The $5 discount is a cash discount and must be dealt with accordingly.

*Effect:for supplier

*increase business expense

*decrease asset & profit

*Effect:for customer

*increase profit & asset

*decrease liability (as customer have to pay after deducting discount).