Example of Early Payment Discount

Example of Early Payment Discount

The discount offered on the early payment to encourage customer for early payment. The early payment by the customer improves the liquidity position of the organization it also reduces risk of default associated with the unpaid amount. Discount allowed on early payment is expense for the organization.

The terms of early payment is normally explained in short form i.e. 2/20, net 60. It means that a discount of 2% will be allowed if payment is made within 20 days instead of sixty days.

Example

ABC & Co made sales of $ 1000 on credit to ABC & Co and early payment discount offered @ 2%.

Solution

1. The entry at the time of sales would be as under

Date	Particulars	Dr.	Cr.
	ABC & Co a/c	1,000
	Sales a/c		1000

2. The following entry would be recorded if Mr. A avails the discount and makes early payment.

Date	Particulars	Dr.	Cr.
	Discount a/c	20
	Cash a/c	980
	ABC & Co		1000

Example Trade Discount allowed

Example Trade Discount allowed

Trade discount on sales are known as trade discount allowed .Trade discount allowed like trade discount received not recorded in the books of accounts rather sales are recorded in books of account net of trade discount. Trade discount is offered at the time of sales are made to the customer.

Example Trade Discount Allowed

ABC & Co made sales of shoes of $ 2,000 on cash from XYX & Co. Trade discount of 5% on the sales was allowed to the XYZ & Co. what would be the entry for the discount allowed by the ABC & Co.

Solution

The purchases will be recorded at net amount i.e. $ 1,900 ($ 2000- $100).

Date	Particulars	Dr	Cr
11 Nov ,2014	Purchases a/c	1,900
11 Nov ,2014	Cash a/c		1,900

Example of Trade Discount Received

Example of Trade Discount Received

Trade discount receive is discount received at the time of purchase. The amount of purchases is reduced with the trade discount and purchases are recorded at net amount. Trade discount is not recorded in the books of accounts. Trade discount must not be confused with early payment discount.

Example Trade Discount Received

ABC & Co made purchases of $ 1000 on cash from XYX & Co. Trade discount of 2% on the purchases was given to the ABC & Co. what would be the entry of the transaction

Solution

The purchases will be recorded at $ 980 ($ 1000- $20).

Date	Particulars	Dr	Cr
11 Nov ,2014	Purchases a/c	980
11 Nov ,2014	Cash a/c		980