Discount allowed and discount received
BUSINESS OPERATORS expect to receive cash discount and to give cash discount. A cash discount is where a firm accepts a smaller sum of money owed if full payment is made within a specific time by the debtor.
We will identify and differentiate between the discount allowed and the discount received below:
DISCOUNT ALLOWED
This is the discount a firm gives its customer when their payment terms and conditions are met as agreed. Below is an example:
QUESTION
On February 1, 2017, Jane Chambers bought some goods from Mario Black and they agreed that if Jane pays the balance of $600 within 20 days, she would get a 5% discount on the amount owed.
You are required to record the transaction in the books of Mario Black.
REASONING
Jane Chambers owes $600 and, therefore, if she pays on time she will receive a reduction of ($600x5% = $30), known in accounting term as discount allowed.
WHAT MUST BE DONE?
1. The discount allowed of $30 is deducted from Jane Chambers’ account to indicate that she owes Mario Black nothing.
2. The balance on the discount allowed account will be entered in the income statement as a business expense.
3. The cheque received from Jane Chambers must be entered in the bank account. This will, in reality, be recorded in the cash book, as below:
WHAT WAS DONE
i.In the three-column cash book, the entry on the debit side shows the receipt of full settlement as was agreed.
ii. When the amount received is added to the discount allowed, full settlement is made.
DISCOUNT RECEIVED
Discount received is a reduction given to the firm by the supplier when the firm pays their account within the discount period allotted. The total discount received is calculated in the cash book and transferred and entered in the general ledger as illustrated below:
DIFFERENCE BETWEEN CASH DISCOUNT AND TRADE DISCOUNT
1. Cash discount is a discount given for speedy payments. It is entered in the double-entry accounts to indicate full settlement.
2. Trade discount is a method of calculating selling price. This is given to firms that buy for resale. It is not recorded in the double entry.
FACTS TO REMEMBER
1. State the formula for the accounting equation Assets = Capital + Liabilities
2. Indicate whether each of the following is an asset or a liability: a. Fittings b. Cash c. Stock of goods d. Trade payables e. Trade receivables f. Motor vehicle g. Loan to employee
3. What is trade discount?
This is given to firms that buy for resale. It is not recorded in the double entry.
4. What is cash discount?
This is a discount given for speedy payments.
5. What is discount allowed?
This is the discount a firm gives its customers when their payment terms and conditions are met as agreed.
6. What is discount received?
Discount received is a reduction given to the firm by the supplier when the firm pays its account within the discount period allotted.
7. What does the dual accounting concept mean? For every debit, there is an equivalent credit entry.
8. What is machinery owned by the business? This is classified as fixed assets.
9. A loan from Owen Simmonds is an asset or a liability? It is a liability.
10. What is a prime function of a business? This is to provide information for action.
11. Give the accounting rule to record an increase in an asset. Debit the asset account.
12. Give the accounting rule to record and decrease in an asset. Credit the asset account.
13. Give the accounting rule to record an increase in a liability and capital.
Credit the account.
14. Give the accounting rule to record a decrease in a liability account. Debit the account.
15. What is true about the double-entry system? Total debits should be equal to total credits.
This is all we have time for this week. Visit with us next week when the presentation will continue. Remember, IF IT IS TO BE, IT IS UP TO ME (10 simple two-letter words.)