Discounts and Sales tax

CAT FA1 Course Notes Contents Page

Discounts

There are two types of discount that can be offered to customers: A trade discount (also known as a quantity or bulk discount). This is a simple reduction n the price of the goods. For example, 10% might be offered if at least 10 units are ordered and 20% if at least 100 units are ordered. A cash (or settlement) discount. This is offered on the condition that payment is received quickly enough. For example, terms might state that a 5% discount is given provided payment is received in less than 30 days. This discount encourages prompt payment.

Sales Tax

Many countries have a sales tax where an amount is added to goods sold and this amount must later be paid over to the Government. In the UK, the sales tax is called VAT (value added tax). The amount of the sales before the tax is added is called the net amount, and after tax is added is called the gross amount. Similarly, most purchases will include an amount of sales tax that is charged by the supplier. It is important to be able to work out gross and net amounts and the amount of tax, and this can best be done by a cost structure.

If there are bulk or quantity discounts, the VAT is calculated on the amount after the discount. The amount of sales tax charged on sales is known as output tax (a tax on goods leaving the business). Business suffer sales tax on their purchases as suppliers have to charge sales tax on their sales; that tax is known as input tax (it is the tax on goods coming into the business). At the end of each tax accounting period, the net of the sales output and input taxes has is paid to or received from the government.