Question

Johnny purchased goods of rs 5000 for cash at 20% trade discount and 5% cash discount, what is the journal entry

Answer 1

Answer:

Step-by-step explanation:

Let`s begin the answer by first understanding the meaning of Cash Discount  and Trade Discount.

Cash discount refers to the discount provided by the creditor to a debtor for making early or instant payment of cash against his dues.

Trade Discount  on the other hand is given by the manufacturers or wholesellers to its traders and retailers so that they get entice to buy in huge quantities.

In the above question three accounts are getting affected namely Puchase , Cash, Discount received. As the Golden rules of accounting;

All expenses are to debited so in this case Purchase account will be debited as it is an expense

Credit what goes out so in this case Cash will be credited

Credit all income so in this case Discount Received is an income received on making early payment.

The journal entry will be as follows

Purchase A/c. Dr  4000

To Cash A/c. 3800

To Discount Received A/c. 200

(Being Goods purchased and received discount )

Calculation:

Price of good Rs 5000/-

Trade Discount @ 20% of 5000/ = Rs.5000 × 20/100= Rs 1,000/-

∴ Net Amount = 5,000 - 1,000= Rs 4,000/-

Cash Discount @ 5% on the price of the good= Rs. 4,000 × 5/100= Rs 200/-

∴ Net Payment made by Johnny Rs 4,000 - Rs 200= Rs 3,800/-

Hope I was clear in explaining.