Unit-2 The Accounting Process

This unit discusses how various transactions are recorded in the Journal and how they will be posted into the concemed ledger accounts.

Distinguish between trade discount and cash discount?

Answer

There ate two types of discounts allowed to customers: i. Trade discount, and ii. Cash discount
Trade discount is a reduction in selling price allowed at the time of sale. The buyer pays only the net price and the recording in books is made for the net amount only. No entry is made in books for the trade discount. Cash discount, on the other hand, is a reduction in the net amount due. It is allowed only if the customer makes payment before the due date. Cash discount must be recorded in the books of account.
This is because when goods were sold to the customer his account was debited with the net amount due. Later, when he makes the payment and is allowed some cash discount, it must be adjusted in his personal account so that his account stands cleared.
When cash discount is allowed to the debtor, it is a loss to the business. So, it is debited to the Discount Allowed Account and credited to the personal account of the debtor. Similarly, when cash is paid to the creditor (the party from whom goods had been purchased on credit) he may also allow some cash discount to the business. Such discount will be a gain to the business. So, it is credited to the Discount Received Account and debited to the personal account of the creditor.