A reduction granted by a supplier of goods/services on list or catalog price is called trade discount. This is done due to business consideration such as trade practices, large quantity orders, etc. It is not separately shown in the books of accounts, entries recorded in purchases or sales book are recorded as net amount, i.e. Gross Amount – Trade Discount.
It is mainly provided to increase the volume of sales attained by a supplier. It is also known as Functional Discount.
Let’s assume that 100 keyboards are sold for the list price of 300 each with a trade discount of 10%.
|100 Keyboards X 300 each||30,000|
|Less 10% of 30,000||30,000 – 3000 = 27,000 (Net Amt)|
It is not shown separately instead Net amount is used in the financials.
Journal Entry for Trade Discount
Trade discount is generally recorded in purchases or sales book, but it is not entered into the ledger accounts and there is no separate journal entry for a trade discount. However, we will provide an example demonstrating how a purchase is accounted in case of trade discount.
Let’s assume that we purchase 100 keyboards from Unreal Pvt Ltd. at the list price of 300 per keyboard and we have been allowed a 10% trade discount. Accounting for a purchase with a trade discount happens as follows:
Total list price = 100 x 300 = 30,000
Less (T.D) = 10% of 30,000 = 3000
Amount to be recorded = list price – discount = 30,000 – 3000 = 27,000
|To Unreal Pvt Ltd.||27,000|