Trade discounts

A trade discount is one given by wholesalers to retailers, so that the retailers can make a profit on the price at which they sell goods to the public. Example:

In this example, the trade discount is 33⅓ of the recommended retail price. However, trade discounts have no place as such in a firm’s accounts. They are deducted before any entry is made in any of the books. As far as the wholesaler is concerned, his price to the retailer is simply £4.00, so £4.00 is the amount the wholesaler enters in his sales day book, and the amount the retailer enters in his purchase day book.

Early settlement discounts

These are discounts offered to persuade customers to settle their debts to the firm early. Typically, a discount of 2½% might be offered for payment within 14 days. But the details can vary. Example:

Firms offer such discounts for two reasons: to speed up cash flow and to reduce the chance of debts becoming bad debts (the longer a debt remains outstanding, the more likely it is to become a bad debt).

If you write up your day books daily, you will not know whether or not an early settlement discount will be taken. You will know once the actual payment arrives. So you have to enter the figure without any deduction of discount into your sales day book. When the debt is paid, if a discount has been properly claimed, the credit entry to that customer’s account will be 2½% less than the account shows. You then need to enter the discount as a credit to his account and a debit to ‘discount allowed account’ in the nominal ledger. This will make up the shortfall. It has the same effect as cash on the customer’s personal account— and so it should: the offer shown on the invoice is like a ‘money off voucher’, and we would expect to treat that the same as cash.

Discounts and VAT

An early settlement discount is based on the invoice total (including VAT). Whether it is claimed or not will not alter the net sale value or the VAT amount which will be entered in the books.

Prime entry of discounts in the cash book

You make your prime entry of discounts in the cash book. But the column you use is unlike the other cash columns: it is not a ledger column, just a prime entry ‘lodging place’. Entries in the discount column of the cash book, unlike entries in its other (ledger) columns, are not part of a dual posting; the dual posting is made in the ‘discount allowed account’ in the nominal ledger for the one part, and the personal customer account in the sales ledger for the other (or ‘discounts received account’ and supplier account, as the case may be). The postings to the discount accounts in the nominal ledger are, of course, column totals rather than individual items.

Entering early settlement discounts

Both the cashier and the ledger clerk will be involved in entering early settlement discounts. When the cheques are first received from customers or sent out to suppliers the cashier will check whether they have been properly claimed by reference to the time limit for early settlement discount and then enter the discounts in the cash book when he is entering the other payment details. For this step-by-step process please refer to pages 19 and 21.

At the end of each month the ledger clerk will make the dual postings to the ledger accounts for each item in the discount columns of the cash book.

Step by step

What you will need is the cash book, sales ledger, purchase ledger and nominal ledger.

• 1.One by one, post each item in the discounts received column to the debit of the named suppliers’ purchase ledger accounts.
• 2.Post the column total for the month to the credit of discounts received account in the nominal ledger.
• 3.One by one, post each item in the discounts allowed column to the credit of the named customers’ sales ledger accounts.
• 4.Post the column totals to the debit of discounts allowed account in the nominal ledger.