why trade discount are not recorded in the books of account Related: ...
Introduction:
Trade discount refers to a reduction in the selling price of goods or services offered by a supplier to a buyer. It is usually provided to encourage bulk purchases, build customer loyalty, or compete with other suppliers. While trade discounts are common in business transactions, they are not recorded in the books of account for various reasons.
Reasons for not recording trade discounts:
1. No impact on net sales: Trade discounts do not affect the calculation of net sales as they are deducted from the list price before the final selling price is determined. Therefore, they do not impact the revenue or income of the business.
2. Complexity and impracticality: Recording trade discounts for each transaction in the books of account can be complex and time-consuming. It would require the creation of separate accounts for each supplier and constant updating as discounts change. This would not be practical for businesses with a large number of suppliers or frequent discount changes.
3. Confidentiality: Trade discounts are often negotiated on a case-by-case basis between the supplier and the buyer. These agreements may be confidential and not intended to be disclosed to the public or competitors. Recording trade discounts in the books of account could potentially reveal sensitive pricing information.
4. Consistency in pricing: Trade discounts are temporary and can vary based on factors such as volume, customer relationship, or market conditions. Including these discounts in the books of account could lead to inconsistencies in pricing and make it difficult to compare the selling prices of goods or services over time.
5. Clarity in financial statements: Excluding trade discounts from the books of account helps to present a clearer and more transparent picture of the financial position and performance of the business. It allows users of financial statements to focus on the actual selling prices and revenue generated by the business.
Conclusion:
Trade discounts are not recorded in the books of account as they do not impact net sales, are complex and impractical to track, may need to be kept confidential, can lead to inconsistencies in pricing, and can affect the clarity of financial statements. However, it is important for businesses to maintain proper documentation and records of trade discounts for internal control and auditing purposes.
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