Topic 4.

1
PRINCIPLE OF DOUBLE ENTRY-

DISCOUNTS

1
 TRADE
No record
DISCOUNT
- Encourage buyer to
buy in bulk

DISCOUNT Purchase
discount
Discount received
CASH
DISCOUNT
Sales
- Encourage buyer to
pay early discount
Discount allowed
2
 TRADE DISCOUNT
• Trade discount is an allowance given by the
seller to the buyer to encourage the buyer to
buy in bulk (large quantities).
Example 1: Bought goods RM2,000 on credit
from Aminah Tading. Received a trade
discount of 5%.
Dr. Purchases 1,900
Cr. A/C Payable [Aminah Trading] 1,900
3
 TRADE DISCOUNT

Example 2: Sold goods RM3,000 on credit to

Abdul. He was given a trade discount of 5%.

Dr. A/C Receivables [Abdul] 2,850

Cr. Sales 2,850

Naimah 4
 TRADE DISCOUNT
• There is NO ACCOUNTING ENTRIES for
trade discount
• Trade discount is deducted direct from
the total purchase/selling price/invoice
price

Naimah 5
 CASH DISCOUNT
• Cash discount is an allowance given by the
seller to the buyer to encourage the buyer to
make prompt payment.
• There are two types of cash discounts:

Purchases Discount [Discount received]

Sales Discount [Discount allowed]

Naimah 6
 CASH DISCOUNT
- Purchases Discount
• Purchases discount is a cash discount received
by buyer from the supplier
Effect of Accounting Equation

Purchases discount reduce the purchases

(expenses decrease)
Expenses decrease; profits increase
Therefore, owner’s equity increase (capital
increase)
Naimah 7
 CASH DISCOUNT
Purchases Discount
Example 1: Paid amount owed to Aminah
Trading by cheque after deducting cash
discount of 2%.
Dr. A/C Payable [Aminah Trading] 38
Cr. Purchases Discount 38 [1900 x 2%]

Dr. A/C Payable [Aminah Trading] 1,862

Cr. Bank 1,862 [1,900 – 38]
Naimah 8
 CASH DISCOUNT
- Sales Discount
• Sales discount is a cash discount given by
seller to the customers (debtors)
Effect of Accounting Equation

Sales discount reduce the sales (revenue

decrease)
Revenue decrease; profits decrease
Therefore, owner’s equity decrease (capital
decrease)
Naimah 9
 CASH DISCOUNT
Sales Discount
Example 2: Abdul settled his amount by
cheque after being allowed a cash discount of
2%.
Dr. Sales Discount 57 [2,850 x 2%]
Cr. Accounts Receivable [Abdul] 57

Dr. Bank 2,793 [2,850 – 57]

Cr. Accounts Receivable [Abdul] 2,793
Naimah 10
 TUTORIAL QUESTIONS
1 Mahmud Kassim Trading purchased
goods having a list price of RM12,000,
a trade discount of 30%, and a cash
discount of 5%. The cash payment to
settle the account within the discount
period is:
a. RM11,400
b. RM7,980
c. RM7,800
d. RM8,400 Naimah 11