Trade Discounts
Normally, businesses have List Prices to refer to for, well, product prices. These product prices are what would be normally tagged for products when sold to day-to-day customers. On the other hand, businesses can offer specially marked-down prices to special customers, that is, they lower the prices of their products.
These decreases in prices can be expressed in percentages or straightforward peso amounts and are called Trade Discounts.
Example 1:
Goods with a list price of P100.00 per unit are offered to Special Customer A for only P90.00 apiece.
Example 2:
Goods with a list price of P100.00 per unit are offered to Special Customer A with a trade discount of 10. (This"10" is 10%. The Trade Discount is P100.00 x 10% = P10.00 apiece. Therefore the new offer price is P100.00 - P10.00 = P90.00 apiece.)
Example 3:
The business offered Special Customer B 10 units of Apollo EyePhone with a list price of P50,000.00 each for a trade discount of 8. If customer Special Customer B accepts, how much will be the total amount of sales made to him?
List Price = P50,000.00;
Trade discount = 8%;
P50,000.00 x 8% = P4,000.00.
New offer price = P50,000.00 - P4,000.00 = P46,000.00.
Alternatively and mathematically, you can arrive at the same answer by: P50,000.00 x 92% = P46,000.00.
If Customer B eventually purchases these 10 products as offered, the entry of the seller will be:
Cash -- P460,000.00
Sales -- P460,000.00
(Invoice price = P46,000.00 x 10 units
Invoice price = P460,000.00 )
Observe that the Trade discount of P40,000.00 does not appear in the journal entries - neither in the seller's books nor in the buyer's books. TRADE DISCOUNT IS NOT RECORDED.
Example 4:
The business offered Special Customer B 10 units of Apollo EyePhone with a list price of P50,000.00 each for a trade discount of 8 and 10. If customer Special Customer B accepts, how much will be the total amount of sales made to him?
List Price = P50,000.00;
1st Part Trade Discount = P50,000 x 8% = 4,000.00.
1st Part Offer Price = P50,000.00 - 4,000.00 = P46,000.00.
2nd Part Trade Discounts = P46,000.00 x 10% = 4,600.00.
2nd Part Offer Price = P46,000.00 - 4,600.00 = P41,400.00.
The final offer price is P41,400.00.
If the buyer contracts/ agrees with P41,400.00, the seller's journal entry will be:
Cash -- P41,400.00
Sales -- P41,400.00