Discounts SS1 Financial Accounting Lesson Note

Discounts are allowances which could be a deduction in price or percentage payment made to retailers by suppliers or manufacturers.

TYPES OF DISCOUNTS

1. Cash Discount

This is an allowance in consideration for prompt payment. This type of discount is allowed by businesses or suppliers where buyers or customers make payment immediately or within a specified period. For instance, within 7 days – 30 days.

i. Discount Allowed: It is a reduction of cash to be paid by a debtor for prompt payment.

When a discount is allowed, the amount is usually entered into the debit column of the discount-allowed cash book.

ii. Discount Received: this is the value of discount received off accounts paid by a trader or a creditor.

When this happens, the amount received is entered in the credit column of the cash book.

2. Trade Discount

It is a reduction from the retail list price offered to the trader. It could also be seen as an allowance made to retailers by the manufacturers or suppliers in the form of a deduction from catalogue prices of goods.

The catalogue or list price is the gross selling price. When the trade discount is deducted, it gives the net selling price.

Trade discounts are also not entered into a cash book.

REASONS FOR GRANTING DISCOUNTS.

1. It is given to encourage bulk purchases
2. To ensure prompt payment
3. To attract customers
4. It is granted to avoid the risk of bad debts
5. It is also granted to provide for the buyer’s or customer’s profit margin.

ASSIGNMENT 

1. State four features of each of the following 

(a) Trade Discounts

(b) Cash Discounts

2. List five reasons why a trader will grant a discount to his customers