AS-L03 — Trade Discounts & Cash Discounts
Understanding how discounts are applied in business transactions and how they are treated within the accounting system.
Learning Objectives
By the end of this lesson students should be able to:
• distinguish between trade discount and cash discount
• calculate trade and cash discounts
• record transactions involving cash discounts
• understand why trade discounts are not recorded
• answer examination-style questions
Concept Framework
What is Trade Discount?
A trade discount is a reduction in the listed price of goods offered by a supplier.
It is usually given:
• for bulk purchases
• to regular customers
Trade discount is deducted before recording the transaction.
What is Cash Discount?
A cash discount is a reduction offered to encourage early payment.
It is given after the transaction has been recorded.
Cash discounts are recorded in the accounting records.
CORE RULES
| Type of Discount | Recorded in Accounts | Accounting Treatment |
|---|---|---|
| Trade Discount | No | Deduct before entry |
| Discount Allowed | Yes | Expense → Debit |
| Discount Received | Yes | Income → Credit |
TRANSACTION LOGIC
Trade discount reduces the invoice value before recording the transaction.
Discount allowed → business gives discount → debit entry
Discount received → business receives discount → credit entry
Worked Examples
Example 1 — Trade Discount
List price of goods = £2,000
Trade discount = 10%
Discount = £200
Recorded value = £1,800
Entry:
Debit Purchases £1,800
Credit Payables £1,800Example 2 — Discount Allowed
Customer owes £600
Discount allowed = £40
Debit Bank £560
Debit Discount Allowed £40
Credit Receivable £600Example 3 — Discount Received
Supplier is owed £900
Discount received = £50
Debit Payable £950
Credit Bank £900
Credit Discount Received £50
📌 Additional questions are available in the 🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define trade discount
Define cash discount
Level 2 – Application Practice
Explain why trade discounts are not recorded in the accounting records.
Level 3 – Examination Style Question
A customer owes £800 and is allowed a cash discount of £50.
Record the double entry.
(2 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you distinguish between trade and cash discounts?
2. Can you calculate discount values accurately?
3. Can you record discount entries correctly?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Debit Bank £750
Debit Discount Allowed £50
Credit Receivable £800
Discount allowed is treated as an expense (debit).
How This Topic Appears in the Examination
This topic commonly appears as:
• calculation of discounts
• recording journal entries
• adjustments in receivables and payables
Examiners assess:
• correct calculations
• accurate double entry
• understanding of discount treatment
Self-Assessment Checklist
I understand trade discounts
I understand cash discounts
I can calculate discount values
I can record discount entries correctly
I can answer exam questions confidently
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