6. Discounts Flashcards
Name the two types of discounts.
Cash Discounts and Trade Discounts
What is trade discount?
Allowance off list price / original selling price.
What is cash discount?
Allowance off the debt settled.
State the purposes of cash and trade discounts.
Cash discount is to encourage debtors to pay on time.
Trade discount is to encourage customers to buy.
State two differences between cash and trade discounts.
Any two:
1. cash discount encourages payment; trade discount encourages buying.
2. cash discount is given at time of payment; trade discount is given at time of buying
3. cash discount is calculated on debt settled; trade discount is calculated on list price
4. cash discount is recorded in the ledger and recorded in income statement;
trade discount is NOT recorded in ledger and not recorded in income statement.
Give the journal where trade discount is recorded.
Sales journal/ Purchases journal / Sales returns journal/ Purchases returns journal
Give the journal where cash discount is recorded
Cash book
Shirley sold goods listed at $5 000 to Mike. A 20% discount was given. What type of discount is this?
Trade discount
[given at time of sale/ deducted from list price]
Desiree paid Clarissa $600 less 4% discount. What type of discount is this?
Cash discount
[given at time of payment]
Samuel bought goods listed at $8 000 from Zachary. Zachary invoiced him $6 000. What was the rate of discount given. What type of discount is this?
Trade discount.
Rate = 25%
[8000-6000] divide by 8000
The cash book of Si Ying showed a credit entry of $630 in the bank column and $70 in the discount column. The particulars wrote “En Yi”. Describe the transaction?
Si Ying paid En Yi $630 by cheque and was allowed a cash discount of $70.
Aaron bought goods $5000 less 20% trade discount from Theo. The bookkeeper did not account for the trade discount. Give the double entries to correct this error.
Dr Trade payable Theo $1000
Cr Inventory $1000
Aaron sold goods $8 000 less 10% trade discount to Analise. The bookkeeper did not account for the trade discount. Give the double entries to correct this error.
Dr Sales revenue $800
Cr Trade Receivable $800
Which discount appear in the trial balance - cash discounts or trade discounts? Why?
Cash discounts.
Trial balance is a list of ledger balances. Since trade discount is not recorded in the ledger, it will not be in the trial balance.
