Wednesday, June 17, 2020

Journal Entry of Discount Allowed with Examples

When a seller giving a discount to a buyer for making the payment within the time limit for which in return a fixed percentage of discount allowed by the seller to the buyer. That discount must be required to record properly in accounting terms. Hence we entered a journal entry of discount. We will also understand about types of discount.

Discount can be categorized into the following parts:
Before understanding journal entries of discount, you must be interested to learn about the abovesaid types of discount.

So let's Understand about 

Trade Discount and Cash Discount

1. Trade Discount:- Trade discount means a discount which is given by the seller during the selling of goods. This type of discount generally gets fixed before entering into an agreement with the parties. Trade discount is deducting from the list price of the goods. It means we are deducting discounts from the invoice value. Moreover, We do not record trade discounts on our accounts. Although, we also can categorize trade discounts as quantity discounts.

2. Cash Discount:- Cash Discount is a type of discount which is allowed in case of making payment by the buyer within the time limit allowed to them. In the case of Cash discount, both parties (seller and buyer) are benefitted because seller will get working capital and on the other side buyer will get material at a discounted price.

Journal Entry of Cash Discount

Example 1
Suppose Mr.A sales tables to a Shilong cafe and the number of tables are 25, per piece Rs.1000. Mr.A was provided a credit period of 3 months to make payment. And In the Invoice, it was clearly mentioned if payment made within 10 days buyer would be liable to get 10% discount.
Pass appropriate journal entry regarding the given problem.


Journal entry for discount allowed

Date Particular Ledger folio Amount(In Rs.)
01/04/2020 Shilong cafe A/c Dr. 100000
 To Sales Cr. 100000
(Being sales recorded of tables amounting to Rs.100000)

Journal entry regarding discount allowed

10/04/2020 Cash A/c  Dr. 95000
Discount Allowed A/c Dr. 5000
 To Shilong cafe A/c Cr. 100000
(Being cash received withing 10 days therefore discount allowed of 10%)

Written by - Pankaj Kumar

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