Key Concepts
Businesses offer two types of discounts. They are treated very differently in the accounts.
| Trade Discount | Cash Discount | |
|---|---|---|
| What it is | A reduction from the list price | A reduction from the invoiced price |
| Purpose | Encourage customers to buy more and to encourage customer patronage (repeat business) and loyalty | Encourage credit customers to pay early |
| When it applies | At time of purchase / sale | When the credit customer settles the amount |
| Recorded? | No — only the invoiced price is recorded | Yes — recorded as Discount allowed or Discount received |
List price — the original price of the goods before any discount is applied.
Cash discount accounts:
| Discount allowed | Discount received | |
|---|---|---|
| Whose perspective | Seller | Buyer |
| What it means | Seller gives a discount to the customer for paying early | Buyer receives a discount from the supplier for paying early |
| Recorded as | Expense | Income |
| Effect on profit | Decreases profit | Increases profit |
| DR / CR to increase | DR (expense) | CR (income) |
| Trade Discount | Cash Discount | |
|---|---|---|
| Recorded? | Never — built into the invoice price | Always — as Discount allowed or Discount received |
| When? | At time of purchase / sale | When the credit customer pays early |
Cash discount accounts:
- Seller gives discount → Discount allowed (expense → DR to record)
- Buyer receives discount → Discount received (income → CR to record)
Quick check: Cash received + Discount allowed = Original invoice amount (the cash paid and the discount must always add up to the full amount originally owed).
- Invoice price = $3,000 × 90% = $2,700
- Cash discount = $2,700 × 2% = $54
- Amount received by cheque = $2,700 − $54 = $2,646
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 2025 | |||
| 1 Mar | Trade receivables — Boon Seng | 2,700 | |
| Sales revenue | 2,700 | ||
| Cost of sales | 1,800 | ||
| Inventory | 1,800 | ||
| 6 Mar | Cash at bank | 2,646 | |
| Trade receivables — Boon Seng | 2,646 | ||
| 6 Mar | Discount allowed | 54 | |
| Trade receivables — Boon Seng | 54 |
6 Mar note: Boon Seng's full debt of $2,700 is cleared. He pays $2,646 in cash; the remaining $54 is written off as Discount allowed (an expense). Together: $2,646 + $54 = $2,700 ✓
Ledger — Trade receivables — Boon Seng (in Firefly Traders' books):
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 2025 | ||||
| 1 Mar | Sales revenue | 2,700 | 2,700 Dr | |
| 6 Mar | Cash at bank | 2,646 | 54 Dr | |
| 6 Mar | Discount allowed | 54 | — |
From the buyer's perspective — journal in Boon Seng's books (Boon Seng also runs a trading business, so he records the goods as inventory):
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 2025 | |||
| 1 Mar | Inventory | 2,700 | |
| Trade payables — Firefly Traders | 2,700 | ||
| 6 Mar | Trade payables — Firefly Traders | 2,646 | |
| Cash at bank | 2,646 | ||
| 6 Mar | Trade payables — Firefly Traders | 54 | |
| Discount received | 54 |
Ledger — Trade payables — Firefly Traders (in Boon Seng's books):
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 2025 | ||||
| 1 Mar | Inventory | 2,700 | 2,700 Cr | |
| 6 Mar | Cash at bank | 2,646 | 54 Cr | |
| 6 Mar | Discount received | 54 | — |
Recording trade discount as a journal entry. Trade discount reduces the list price before journalising. It is never entered in the journal or ledger.
Confusing Discount allowed and Discount received. "Allowed" = given by the seller (expense, Dr to record). "Received" = received by the buyer (income, Cr to record).
Not clearing the full Trade receivables / Trade payables balance. Payment plus discount must together equal the full balance. Always verify: cash received + discount allowed = balance cleared.