To Know the Difference Between Trade Discount and Cash Discount we have to know the meaning of the both with an example:
Trade Discount means the reduction in the list/dealer price of goods at the time of dealing with a buyer of goods. It has not shown in the books of account Because TD is set before actual sale arise. So, Here is no journal entries for the Trade Discount.
Example of the TD:
Mr Ram dealing with his distributor to set the rate of a new product launch by his company.
Actual Dealer Price of New Product set by the company is Rs. 1,200/-
But Dealer negotiate to reduce the price to Rs 1,150/- per piece
Mr Ram also negotiate to Increase the price to Rs 1,180/- per piece
after discussion, they set the price of the product Rs 1,160/- per piece
Trade Discount = Actual price – Negotiated Price
1200 – 1160 = 40/-
So, TD is Rs 40/- per piece
Cash Discount means the reduction in the amount of the Payment receivable from the creditor or payable to debtors to encourage to get paid or received earlier. It has shown in the books of account Because CD is set After the actual sale is done.
Example of the CD:
Mr Sham has amount receivable from Mr Ram for Rs 15,000/-.according to payment cycle Mr Ram will pay amount after one month as agreed at the time of sale.
But Mr Sham offer to Mr Ram, that he will allow him to discount for 5% on the total amount due if he will pay him within 7 days after the time of sale.
So, the amount of Cash discount is Rs 750/- (15000*5%).
|BASIS FOR COMPARISON||TRADE DISCOUNT||CASH DISCOUNT|
|Meaning||Trade Discount means the reduction in the list/dealer price of goods at the time of dealing with a buyer of goods||Cash Discount means the reduction in the amount of the Payment receivable from the creditor or payable to debtors|
|Benefit||Received order in Bulk||Received payment earlier|
|Time of Discount||At the time of dealing or sale||At the time of payment|
|Universal to all customer||Yes (if deal prompted on store etc.)
No (if dealing by company separately with a single distributor)
|Record in Books||Only recorded on Invoice, not in financial Books||Yes recorded in Financial books|
|Taxes||No need to pay taxes on trade discount||Yes because it will provide after sale|
|Vary with||The number of goods purchased in the given time||Payment made in given time|
Mr A want to purchased goods from Mr B,
So, Mr B offers a 10% discount to Mr A on the Dealer/list price Rs 500/- Per piece, if he ordered goods minimum 100 pcs quantity.
Further, Mr B also offers a discount of Rs. 2% to Mr A if he will make payment within one week.
on 05/02/2018. Mr A avail both the offer and make payment immediately.
In this type of transaction, we have to calculate trade discount first and on balance amount calculate cash discount as the following:
1st Step -> Total Purchase price = 500*100 = 50,000/-
2nd Step -> Trade Discount = 50000*10/100 = 5,000/-
3rd Step -> Net Purchase Price = 50000-5000 = 45,000/-
4th Step -> Cash Discount Availed = 45000*2/100 = 900/-
5thStep -> Net Payment Due = 45000-900 = 44,100/-