Trade Discount: Notes on Trade Discount

Trade discounts are often granted to wholesalers who buy in high volumes. A sales discount (also known as a cash discount) is one you offer to a customer as an incentive to pay an invoice within a certain time, according to the University of Minnesota. You must record this discount in a separate account in your records and report the amount on your income statement. In accounting, a trade discount is a reduction in price a manufacturer or wholesaler offers a trade buyer on the list price of goods.

Trade discount allowed is a direct expenditure for a business firm since it is directly relate to sales. Therefore, the trade discount allowed should be shown in expenses side of trading account. Since the trade discount allowed is directly reduced from the sale value, that is why, some time it is not shown separately in trading account.

What is a trade discount?

It is included in the cash discount which is shown on the challan/invoice. This will provide the total dollar amount of the trade discount, which can then be subtracted from the original list price to provide the net price. The following examples reflect situations where trade discounts are often used.

Subtract the amount of the sales discount from the full invoice amount to determine the amount of cash you receive when the customer pays the invoice. In this example, assume your customer received a 1 percent discount, or $1, for paying early. As per prevailing practice or terms of purchase and sale, a certain amount of money determined at a fixed rate trade discount and deducted from invoice price or amount receivable is called the discount. Bulk sales are typically allowed and encouraged for a trade discount. List Price is the proposed retail price, which the manufacturer or distributor decides, and is listed in their catalog. The difference between the list price and the amount of discount is the net price.

What Does Trade Discount Mean?

It is important to note that trade discount is not recorded in books of account. A trade discount is different than a sales discount because a trade discount does not have the same restrictions as a purchase discount. Trade discounts are usually given to wholesalers that order large quantities of a product as well as retailers with good relationships with the manufacturer. Purchase discounts or cash discounts are based on payment plans not order quantities. Manufacturers and wholesalers typically produce catalogs for customers and vendors to order products from. The prices listed in the catalogs are often called list prices or manufacturers suggest retail price (MSRP).

It is typically documented in the purchase or sales book, but it is not entered into the ledger accounts, and there is no separate journal entry to reflect this. But when the trade is allowed then it shall be recorded as an expense. However, the following is an example of how a purchase is accounted for in the case of a trade discount. May 1st, 2019 Mr. Mackenzie purchased goods from Mrs Ponzzy of list price $1,800 on cash.

Recording a Sales Discount in the General Ledger

Trade discounts are also based on customer loyalty and vendor relationships over time. A shipping company decides to begin offering a trade discount to its corporate customers that ship a high volume of packages. The trade discount is based on the number of packages shipped per month. The company decides that any corporate customer that ships over 10,000 packages per month will receive a 5% trade discount.

• Trade Discount is the reduction in the retail price of products that arises from bulk sales or purchases.
• The size of the trade discount offered depends on the quantity of the goods purchased and the relationship between the manufacturer or wholesaler and the reseller.
• E.g. ABC Ltd offers 5% discounts for customers who settle their debts within a two-week period from the date which sale is conducted.
• It is neither recorded in the books of accounts of the manufacturer nor the wholesaler/retailer.
• Trade discount is provided to persuade buyers to make larger orders, while cash discounts are early payment discounts that act as an incentive for them to pay promptly.
• A customer can enjoy both trade discounts and cash discounts if he/she is making cash payments for the goods purchased.
• Offering trade discounts is a standard practice in many sectors as a means of encouraging clients to make greater purchases or to develop long-term business partnerships.
• Twin Brother co ltd gave Pauline a trade discount of 10% for she is a business woman and had bought goods in large quantities.
• It is typically documented in the purchase or sales book, but it is not entered into the ledger accounts, and there is no separate journal entry to reflect this.

Trade discounts are not recorded in the accounting records of the reseller, while sales discounts are. A trade discount is a discount given by the seller to the buyer at the time of making a sale. This discount is a reduction in the list prices of the quantity sold. The main objective of trade discount is to encourage customers to purchase company’s products in more quantities. Trade discounts can be commonly seen between companies who sell products business to business (B2B). Since trade discount is a reduction from list price, it will not be recorded in the accounts.

For example, let’s say that Manufacturer M sells 1,000 units of product on credit to a Wholesaler W at a list price of $10 per unit, with a 5% trade discount granted by the seller to the buyer. Even though trade discounts can be recorded in the daily purchase and sales books for bookkeeping needs, there is no separate journal entry made into the general ledger for accounting purposes. The trade discount may be stated as a specific dollar reduction from the retail price, or it may be a percentage discount. The trade discount customarily increases in size if the reseller purchases in larger quantities (such as a 20% discount if an order is 100 units or less, and a 30% discount for larger quantities). Trade discount is provided to persuade buyers to make larger orders, while cash discounts are early payment discounts that act as an incentive for them to pay promptly. A trade discount is typically a certain percentage of the suggested retail price, while cash discounts possess fixed amounts.