In a layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc.

No journal entry is recorded separately in the books of accounts for trade discounts. The entries that are shown in the sales or purchase books are recorded as the net amount.

This type of discount is simply utilised to determine the net amount for a customer. Since the trade discount is deducted before any exchange takes place, it does not have any accounting entry.

Example

A distributor sells goods to Mr. U amounting to the list price of 8,000 and offers a trade discount of 10% as the customer purchased goods in bulk. The net price will be calculated as follows:

List price = 8,000
Trade discount = 10%

Net amount = 8,000 – (8,000 x 10%)
= 8,000 – 800
= 7,200.

The journal entry in the books of the distributor is as follows:

(being goods sold)

The journal entry in the books of Mr. U is as follows:

(being goods purchased)

Note: The seller as well as the buyer will record the transactions in the books of accounts after subtracting the trade discount allowed from the original amount. As shown in the example above, both the distributor and Mr. U shall record the transaction at 7,200. No separate entry shall be shown for trade discount.

Hope this helps.