Discount can be defined as the reduction in the catalogue price of an article or goods in order to encourage bulk purchase and prompt payment.
Reasons for Granting Discount:
1. To encourage large quantity purchases.
2. Help to avoid the risk of bad debts.
3. To encourage prompt payment.
4. Discount attracts Customers.
5. It provides for the buyer’s profit margin.
6. To avoid tying down business capital.
Types of Discounts:
Discount is divided into two (2) namely:
(i) Trade discounts
(ii) Cash discounts
1. Trade Discount:
This is an allowance made by the manufacturer or wholesale to the retailer in form of a reduction from the catalogue prices of goods supplied. It is an inducement to the customer to buy goods in large quantities. It is charged on the subsidiary books of account such as purchases, and sales day books.
Features of Trade Discount:
(i) Allowed for quantity purchases.
(ii) Appears in the day book alone.
(iii) Allowance off the invoiced price.
(iv) Trade discount must be deducted before cash discount.
2. Cash Discount:
This is a percentage allowance to customers for prompt payment of an account or for payment within a specified period of time. It is not ignored in the account as with trade discounts. It is charged on the cash book.
Features of Cash Discounts:
(i) It is conditional
(ii) To ensure prompt payment
(iii) It appears in the cash book
(iv) It is deducted after trade discount has been deducted.
Classification of Cash Discounts:
(a) Discount Allowed: This is the discount given to the customers for prompt payment of their accounts. It is entered on the debit side of the three-column cash book and it is treated as an expense in the profit and loss account.
(b) Discount Received: This is the discount received by a firm from its suppliers when it pays its accounts promptly or quickly. It is as an income in the profit and loss account and credited to the three-column cash book.
Differences between Cash and Trade Discounts:
|S/N||Trade Discount:||Cash Discount:|
|(i)||Allowance off the Invoice price||Allowance for prompt payment|
|(ii)||It appears in the day Books||It appears in the Cash book and ledger|
|(iii)||It is unconditional. |
Every customer is entitled to it.
|It is conditional i.e. settlement of account|
within a certain time.
|(iv)||Must be deducted first||Must be deducted after trade discount |
has been given.
Format of Three Column Cash Book: