A reduction granted by a supplier of goods/services on list or catalogue 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 the 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 a 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
It is generally recorded in the purchases or sales book, but it is not entered into ledger accounts and there is no separate journal entry. However, here is an example demonstrating how a purchase is accounted in case of trade discount.
Let’s assume that 10 tables are purchased from Unreal Pvt Ltd. at the list price of 3000 per item and 10% discount (trade) is allowed. Accounting for the transaction will happen as follows:
Total list price = 10 x 3000 = 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|
>Read Cash Discount