CHAPTER 6 - DISCOUNTS

Question 1

What is a trade discount and how is it recorded?

Answer 1

What?

• A discount off the list price to trade customers
• eg. for volume order or to encourage loyalty
• % of full price of goods

How recorded?

• Full price and deduction shown on invoice
• VAT calculated after deduction
• Only net value (after discount) and VAT recorded in accounts - discount isn’t recorded

Question 2

What is a cash / settlement discount?

Answer 2

A discount taken off the the net vaue of the goods (after any trade discounts deducted) for paying early

Question 3

What is a Discount Received and how is it recorded?

Answer 3

What?

• A cash discount taken by us when paying a supplier’s invoice
• Treated as a gain and transferred to the P&L as income at year end

How recorded?

• Credit Bank the amount paid
• Debit creditor the amount paid
• Debit credtor the discount amount and
• Credit Discount Recieved account

Question 4

What is a Discount Allowed and how is it recorded?

Answer 4

What?

• A cash discount given by us to a debtor for paying early
• Taken off the net price (after trade discounts)
• Treated as a loss and moved to the P&L as an expense at year end

How Recorded?

• Debt Bank amount paid
• Credit debtor account amount paid
• Credit debtor account discount value
• Debit Discount Allowed account

Question 5

How is VAT calculated and recorded where a cash discount is applicable?

Answer 5

VAT is calculated on the net value of the goods (after trade discount) minus the proposed cash discount

It isn’t recalculated if the cash discount isn’t taken

eg.

• Goods £100
• Trade Discount (10%) £10
• Net Value £90
• VAT £17.64
• Total £107.64

(not shown on invoice)

Net (£90) minus 2% cash discount (£1.80) = £88.20

So work out VAT on £88.20 = £17.64