Double Entry Model

Trade Discounts and Cash Discounts

Two very different types of discount appear in accounting — they are treated completely differently.

Trade Discount

A trade discount is a reduction from the list (catalogue) price given to a customer, usually for buying in bulk or for being a regular trade customer.

• Agreed before the invoice is raised — the invoice simply shows the net price
• Never recorded in the ledger — no double entry exists for a trade discount
• The trade discount simply reduces the purchase price: a £1,000 item with 20% trade discount is invoiced at £800 and recorded at £800

Key point: Trade discounts are invisible in the bookkeeping records. They appear only on the face of the supplier's invoice.

Cash Discount (Settlement Discount)

A cash discount is offered to a customer (or received from a supplier) as an incentive for paying within an agreed period (e.g. 2% if paid within 14 days).

• Also called a settlement discount or prompt payment discount
• Is recorded in the ledger — a double entry is required
• Appears in the memorandum discount columns of the three-column cash book

Double Entry for Cash Discounts

Worked Example

Bramfield Ltd owes us £500. We allow a 3% settlement discount for payment within 10 days. Bramfield pays within 10 days.

• Discount = £500 × 3% = £15
• Bramfield pays: £500 − £15 = £485

Double entry:

• DR Bank £485
• DR Discount Allowed £15
• CR Trade Receivables — Bramfield £500

The full £500 is removed from the receivable; £485 is received; £15 is an expense.

Summary