July 5, 2020


Accounting + Finance Blog

Trade discount calculation and accounting entry

Trade discount calculation and accounting entry

If you’re familiar with accounting, buy stuff online, or own a business, the discount is not a new word. Now and then, businesses give out discounts to their clients and customers. However, a trade discount is a special kind of discount. What is a trade discount? How do you calculate it? Does it have accounting entries? Let us find out here.

Ads you may like

Definition of trade discount

Trade discount is defined as a reduction in the selling price of goods or services to enable retailers to sell and earn a profit.

It is also referred to as allowances off selling price for bulk purchases.

How to calculate trade discount


Ads you may like

A firm has a policy of trade discount of 5% if a customer buys more than 2000 units. A sale was made to Mr. Ahmed for 2,300 units at 50 Naira per unit. What’s the trade discount given to Mr. Ahmed? How much did Mr. Ahmed pay for the goods?

READ ON  What is the account in accounting?


The total amount for the goods is 2,300 units × 50 Naira. With your calculator, you should have 115,000 Naira.

The trade discount given to Mr. Ahmed is 5% of 115,000 Naira. That is 5 ÷ 100 × 115,000. This gives 5,750 Naira. So, Mr. Ahmed will not pay 5,750 Naira.

Ads you may like

The amount Mr. Ahmed paid for the goods is 115,000 – 5,750. This is equal to 109,250 Naira. Therefore, Mr. Ahmed paid 109,250 Naira for the goods.

Accounting Entry for trade discount

When a trade discount is given by a business, there is no accounting entry for it.

In the above example, the firm will not record the trade discount of 5,750 Naira in its book of account. The sales amount for the goods is 109,250 Naira which will be recorded in the sales account and cash (Treasury) account.

READ ON  Detailed Definition of bookkeeping with explanations

In conclusion, a trade discount is an impetus to sell in a large quantity. Also, it gives retailers the opportunity to earn a profit. The discount given is the profit to the retailer.

Ads you may like

Learn more about VAT Accounting.

The book contains worked examples that will help you understand how VAT works. Google was to show how the double-entry works.

The book worth 5 USD right now. Here is the link to buy yours.