Trade discount reduces the listed price and is never recorded separately. Cash discount is earned by paying early, so it is recorded in the cash book and the customer’s account.
This lesson is part of books of prime entry. The cash book layout used here is in recording transactions in a cash book.
How do the two discounts differ?
The trade discount is settled before the books are touched, because it changes the invoice amount itself. The cash discount depends on the customer’s behaviour later, so it is recorded only when payment arrives.
| Trade discount | Cash discount | |
|---|---|---|
| Given for | Buying in quantity or being a trade customer | Paying within the agreed days |
| Recorded in books | No, only the net amount | Yes, in the cash book |
| Calculated on | Listed price | Net invoice |
Worked example: one invoice, two discounts
Kedai Borneo invoices a customer for goods listed at RM2 000. A trade discount of 15% applies. The customer may deduct 2% if paying within 10 days, and pays on day 8.
- Trade discount: 15% × 2 000 = RM300.
- Net invoice: 2 000 − 300 = RM1 700, entered in the sales journal.
- Cash discount: 2% × 1 700 = RM34.
- Payment received: 1 700 − 34 = RM1 666.
In the cash book, the debit side shows bank RM1 666 and discount allowed RM34. The customer’s account is credited with both RM1 666 and RM34, closing it at zero.
The mistake that costs marks
The common slip is to take 2% of the listed amount, RM2 000, which gives RM40. That discount is larger than the customer earned, and the payment comes out at RM1 660.
| Step | Wrong | Right |
|---|---|---|
| Base for cash discount | 2 000 | 1 700 |
| Discount allowed | RM40 | RM34 |
| Payment | RM1 660 | RM1 666 |
The fix is a two-line habit. First write the net invoice, and only then write the percentage.
What if the customer pays late?
Then no cash discount applies. The customer pays the full net invoice of RM1 700, and the cash book shows bank RM1 700 with nothing in the discount column.
The business only records a discount when it has actually been taken.
Check yourself
A supplier’s list is RM5 000. A trade discount of 10% applies, and a 3% cash discount is given for payment within 14 days. The business pays in 12 days. Find the net invoice, the discount received and the payment.
Answer
Net invoice: 5 000 − 10% × 5 000 = 5 000 − 500 = RM4 500.
Discount received: 3% × 4 500 = RM135.
Payment: 4 500 − 135 = RM4 365. Discount received is shown on the credit side of the cash book.
What to study next
Test the chapter on the books of prime entry practice set. If the same error returns, log it with the mistake log and paper-error review, or see online one-to-one Accounting tuition.