Podcast
Questions and Answers
Which of the following statements accurately differentiates between trade discounts and cash discounts?
Which of the following statements accurately differentiates between trade discounts and cash discounts?
- Trade discounts encourage prompt payment, while cash discounts directly reduce the listed price.
- Trade discounts boost sales by reducing the price for all customers, cash discounts avoid bad debt on credit sales. (correct)
- Trade discounts are recorded as a credit to 'Discount Received,' while cash discounts reduce the purchase amount.
- Trade discounts require a separate ledger entry, while cash discounts are directly deducted from the invoice.
A company purchases goods from a supplier on credit and receives both a trade discount and a cash discount. In which order are these discounts applied to determine the final amount due?
A company purchases goods from a supplier on credit and receives both a trade discount and a cash discount. In which order are these discounts applied to determine the final amount due?
- The trade discount is applied first, followed by the cash discount on the reduced amount. (correct)
- The trade discount and cash discount are added together and applied as a single discount.
- The cash discount is applied first, followed by the trade discount on the reduced amount.
- The order of application does not matter; the final amount due will be the same regardless.
When goods are purchased on credit and a trade discount is offered, which account is credited?
When goods are purchased on credit and a trade discount is offered, which account is credited?
- Cash Account
- Purchases Account
- Account of the Seller (correct)
- Discount Received Account
A company purchases goods for INR 50,000 with a 15% trade discount and a 5% cash discount. If the company pays immediately, what is the final amount debited to account 'Purchase Account Debit'?
A company purchases goods for INR 50,000 with a 15% trade discount and a 5% cash discount. If the company pays immediately, what is the final amount debited to account 'Purchase Account Debit'?
Goods are purchased from Priya for INR 30,000 with a 10% cash discount. Which of the following journal entries correctly reflects this transaction if the payment is made immediately?
Goods are purchased from Priya for INR 30,000 with a 10% cash discount. Which of the following journal entries correctly reflects this transaction if the payment is made immediately?
Flashcards
General Entries
General Entries
Accounting records that track financial transactions.
Trade Discount
Trade Discount
A discount directly deducted from the original price to boost sales, usually on MRP.
Cash Discount
Cash Discount
A discount offered to encourage immediate payment in cash, reducing bad debts.
Discount Received Account
Discount Received Account
Signup and view all the flashcards
Purchases Account Debit
Purchases Account Debit
Signup and view all the flashcards
Study Notes
General Entries and Discounts
- General Entries are accounting records that track financial transactions.
- Trade Discount is a discount offered to boost sales, applied to all customers, and directly reduces the original price, usually based on the Maximum Retail Price (MRP).
- Cash Discount is offered to minimize bad debts on credit sales and is applied when a transaction is paid with cash.
- Trade Discount is often used in loan transactions and is subtracted directly from the transaction.
- Cash Discount needs a separate entry as a credit to the Discount Received account; it's a benefit for the purchaser.
- Trade Discount doesn't require a separate entry; it is deducted before recording the purchase amount in the ledger.
Applying Discounts to Purchases
- Purchases Account is debited because purchases are expenses.
- Credit is given to the Seller's account when a purchase is made on credit.
- Credit is given to the Cash Account when a purchase is paid in cash.
- Discount Received Account is credited when a Cash Discount is received.
- Example: Purchasing goods from Manoj for INR 10,000 with a 10% trade discount results in:
- Purchases Account Debit: INR 9,000 (10,000 - 1,000 trade discount)
- Manoj Credit: INR 9,000
Homework
- Complete general entries for these transactions:
- Purchased goods from Chetan for INR 20,000
- Purchased goods from Chetan for INR 20,000 with 10% trade discount
- Purchased goods from Chetan for INR 20,000 with 20% cash discount
- Purchased goods from Chetan for INR 20,000 with 20% trade discount and 10% cash discount
- Remember to include the Discount Received account where applicable.
- Next lesson will cover sales transactions.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Explore accounting entries and discounts, including trade and cash discounts. Learn how these discounts affect purchase records and ledger entries. Understand the difference in accounting treatment for trade and cash discounts.
