There are two types of discounts:

    1. Cash discounts
    2. Trade discounts

1       Cash Discounts

Cash discount is also called credit discount. Cash discounts are given to encourage early payment by customers. Cash discounts are treated as finance cost. Following are the accounting entries for cash discount:


Account Receivable           DR

Sales                                              CR

(To record credit sales by a vendor)

Cash                                      DR

Discount allowed                      CR

Account Receivable                  CR

(To record cash discount given to customer on cash received)

Discount allowed is treated as financial cost in SOCI


Purchase                            DR

Account Payable                     CR

(To record credit purchase by a customer)

Account Payable              DR

Discount Received                 CR

Cash                                          CR

(To record discount availed by customer on cash payment)

Discount received is treated as finance income in SOCI.

1       Trade Discounts

Trade discount allowed on purchases should not be deducted from list price before calculating sales tax.

For accounting purpose, trade discounts are not taken into account. Sales revenue, purchases and expenses are recognized at consideration given in exchange for goods or services rather than at the list price.


List price $100

Trade discount $10

Cash paid for purchase of goods $90


Make a journal entry for above transaction.


Purchase       90

Cash                     90

Illustration 2:

List price $100

Trade discount $10

Cash received for sale of goods $90


Make a journal entry for above transaction.


Cash              90

Sales                     90

Note: Trade discount is not taken into account.

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