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I seem to be having a bit of challenge understanding the above mentioned concept. I did a mid-term yesterday where 4 question where based on this topic and didn’t get out anything near to the answers avalaible. Can someone assist?
Cash discount you get when you pay cash on stipulated time to settle your debt for the merchandise you received. Trade discount you get when you buy some thing in bulk.
When you go to the market to buy flour for your bakery, you will haggle with the seller and get some sort of price reduction or discount. if the flour mill asks for $4.2/kg, you will argue and settle with some lower price.. for example 4.0. the 0.2 discount you got was a TRADE DISCOUNT.
Now, that the purchase price has been agreed, which is $4/kg, the flour mill will send the flour and you will also get an invoice from the mill asking you to pay the invoice in ur decided credit period, like 30 days or so. The invoice will mention the TERMS. The terms will say if you pay within X number of days (where X will be less than 30 days) the mill will give u an extra discount. this is known as CASH DISCOUNT.
CASH DISCOUNTS are used by sellers to get their customers to pay up early (everyone likes money in their own pockets..:) ). Of course, the quicker u get ur money, the more secure you are and u can use that money elsewhere in ur business.
Trade Discounts are NOT recorded anywhere in the day books. but Cash discounts are recorded as Discounts Allowed (discounts given by you to your customers) or as Discounts Received (discounts given to you by ur suppliers, like the flour mill above)
Hope this helps… if u need further help…go ahead and ask!
mansoor
mansoor tried with the explanation but be carefull in treating qsts on this cos there are always unwanted info that you’ll see in the qst nd if care is not takin you can find yourself missing it out.
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