Question

write the journal entry-"Discount given to M3M company?​

Answer 1

Answer:

Discount Allowed

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Discount Allowed

Discounts may be offered on sales of goods to attract buyers. Discounts may be classified into two types:

Trade Discounts: offered at the time of purchase for example when goods are purchased in bulk or to retain loyal customers.

Cash Discount: offered to customers as an incentive for timely payment of their liabilities in respect of credit purchases.

Trade Discount

Trade discounts are generally ignored for accounting purposes in that they are omitted from accounting records.

Therefore, sales, along with any receivables in the case of a credit sale, are recorded net of any trade discounts offered.

Example

Bike LTD as part of its sales promotion campaign has offered to sell their bikes at a 10% discount on their listed price of $100.

Sale revenue and any accounts receivable will be recorded net of trade discount, i.e. $90 per bike.

Cash Discount

Cash discounts result in the reduction of sales revenue earned during the period. However, not all customers may qualify for the cash discount. It is therefore necessary to record the initial sale and receivables at the gross amount (after deducting any trade discounts!) and subsequently decreasing the sale revenue and accounts receivable by the amount of discount that is actually allowed.

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