Prepare journal entries : sold goods 10% trade discount 5% cash discou...
Journal Entries for Sale of Goods with Trade and Cash Discounts
Step 1: Determine the Net Amount
To determine the net amount, we need to calculate the trade discount and cash discount first.
- List Price: $80,000
- Trade Discount: 10%
- Cash Discount: 5%
The formula to calculate the trade discount is List Price x Trade Discount %. Therefore, the trade discount is $80,000 x 10% = $8,000.
The formula to calculate the net amount after trade discount is List Price – Trade Discount. Therefore, the net amount after trade discount is $80,000 - $8,000 = $72,000.
The formula to calculate the cash discount is Net Amount x Cash Discount %. Therefore, the cash discount is $72,000 x 5% = $3,600.
The formula to calculate the amount paid immediately is Net Amount – Cash Discount. Therefore, the amount paid immediately is $72,000 - $3,600 = $68,400.
Step 2: Record the Journal Entries
We need to record two journal entries to record the sale of goods with trade and cash discounts.
- First Journal Entry: To record the sale of goods on credit.
- Second Journal Entry: To record the receipt of cash from the customer.
First Journal Entry
- Debit: Accounts Receivable - $80,000
- Credit: Sales - $72,000
- Credit: Discount on Sales - $8,000
Second Journal Entry
- Debit: Cash - $68,400
- Debit: Discount on Sales - $3,600
- Credit: Accounts Receivable - $72,000
Step 3: Explanation
When goods are sold with a trade discount, the seller offers a percentage discount to the buyer from the list price. In this case, the list price is $80,000, and the trade discount is 10%, which means that the buyer gets a discount of $8,000.
When goods are sold with a cash discount, the seller offers a percentage discount to the buyer if the payment is made within a specified period. In this case, the cash discount is 5%, which means that the buyer will get a discount of $3,600 if the payment is made immediately.
The net amount is the amount that the buyer needs to pay after the trade and cash discounts are applied. In this case, the net amount is $72,000.
The first journal entry records the sale of goods on credit. The accounts receivable is debited, and the sales and discount on sales are credited. The accounts receivable represents the amount that the buyer owes to the seller. The sales account records the revenue generated from the sale of goods, and the discount on sales account records the trade discount given to the buyer.
The second journal entry records the receipt of cash from the customer. The