Key Concepts
You met trade and cash discounts in the Trade Discount and Cash Discount section of the double-entry recording chapter. Here is a quick refresher, then we focus on the part that matters for trade payables: the discount the business receives from a supplier.
| Trade discount | Cash discount | |
|---|---|---|
| Purpose | Encourages the buyer to buy in bulk (or rewards a regular/loyal customer) | Encourages the buyer to pay early |
| Based on | A % off the list price (the published price before any discount) | A % off the amount owed (the invoice price) |
| Recorded? | Never recorded — only the price after the trade discount is entered in the books | Always recorded — as Discount allowed (seller) or Discount received (buyer) |
An invoice is the supplier's bill — it shows what is owed and by when. The price on it, after any trade discount, is the invoice price:
The trade-payables angle — discount received is income. When the business pays a supplier early and the supplier gives a cash discount, the business records Discount received. From the buyer's side this is an income — the business ends up paying less than it owed, so it gains. (In the supplier's own books the same discount is Discount allowed, an expense — the two are mirror images: the same discount, recorded oppositely in each business's books.)
Trade discount applies to returns too. If goods bought with a trade discount are later returned, record the return at the same trade discount rate used for the original purchase. For example, goods with a $1,000 list price bought at a 10% trade discount are returned at $1,000 − 10% = $900.
Effect of a discount received on profit and trade payables. A discount received does two things at once:
- It is an income, so it increases profit for the period.
- It settles part of what the business owes, so it decreases trade payables.
Both move by the amount of the discount.
Trade = the quantity you buy, never recorded. Cash = how quickly you pay, recorded. For trade payables, the cash discount you get is Discount received — an income (credit to record). It increases profit and lowers what you owe.
- 2 May — Redhill Supplies bought goods with a list price of $8,000.
- 5 May — Redhill Supplies returned some of the goods, list price $500.
- 7 May — Redhill Supplies paid the amount owing by cheque, within the discount period.
- 2 May purchase: $8,000 − 10% = $7,200.
- 5 May return: $500 − 10% = $450.
Amount owed = $7,200 − $450 = $6,750.
Paid within 7 days, so the 4% cash discount applies: 4% × $6,750 = $270 discount received.
Cash paid = $6,750 − $270 = $6,480 by cheque.
The $270 discount received is an income, so profit increases by $270; it also settles part of the debt, so trade payables decrease by $270.
Recording the trade discount. The trade discount is never entered in the journal or ledger — only the price after deducting it. Here, $7,200 is recorded, not $8,000.
Working out the cash discount on the list price. The cash discount is a % of the amount owed (after trade discount and any returns) — $6,750 here, not $8,000.
Treating discount received as an expense. From the buyer's side the discount is an income — the business gains by paying less than it owed.