Every company selling goods have to give discount at some point of time to the buyer of product of the company. There are two types of discounts while trade discount is given voluntarily to its customer by the company whereas cash discount is given to customers so that they make payment at the earliest, given below is the accounting treatment for cash and trade discount –
Trade discount entry
In accounting there is no journal entry passed for trade discount, because the price is already deducted from the selling price by the seller at the time of selling the goods. Since there is no journal entry there is no question of it appearing in trial balance or profit and loss account.
Cash discount entry
Since cash discount is an expense it is debited, so for example if customer A has bought goods worth $2000 and the company gives cash discount of 10 percent then accounting entry for such transaction will be –
Cash account Dr $1800
Discount account Dr $200
To Customer A account $2000
Hence as one can see from the above that cash discount appears on the debit side of profit and loss account and it reduces the profit of the company.