ACCO101 - Financial Accounting Questions

Assistance on Accounting Problems

Trade Discounts

Merchandisers offer their goods to customers using a catalog where the goods are listed with their prices. The prices are called catalog or list prices. A trade discount, which is a percentage reduction from a published list price, may be granted to certain customers such as dealers or wholesalers for buying frequently and in large quantities. Since a trade discount is granted at the point of sale, this is immediately deducted from the list price and the difference which is called the gross invoice price will be the basis for invoicing and recording.

Both the buyer and seller do not record the list prices and the trade discounts in their books of accounts. The buyer records purchases and the seller records sales net of trade discounts.

To illustrate: Assume that S Company sold merchandise with a list price of P 100,000 and a trade discount of 15% and 10%. Sales price or invoice price is computed as follows:

List price P 100,000

Less: First trade discount

(15% x P 100,000) 15,000

Balance after discount P 85,000

Less: Second trade discount

(10% x P 85,000) 8,500

Net sales price P 76,500

Alternative way of computing the invoice price is to multiply the list price by the complements of the trade discounts allowed. The computation is shown below:

Invoice Price = (P 100,000 x 85% x 90%)

= P 76,500

The complement of 15% is 85%, and the complement of 10% is 90%

the buyer will then record the purchase using the periodic system as:

dr Purchases 76,500

cr Cash/AP 76,500

credit cash if paid on the date of purchase or credit Accounts Payable if bought on credit

the seller will record the sale as

dr Cash/AR 76,500

cr Sales 76,500

debit cash if collected on the date of sale or debit Accounts receivable if sold on credit.

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