Commerce Exam > Commerce Videos > Basic Accounting Terms - Trade Discount & Cash Discount : Class 11
Basic Accounting Terms - Trade Discount & Cash Discount : Class 11 Video Lecture - Commerce
FAQs on Basic Accounting Terms - Trade Discount & Cash Discount : Class 11 Video Lecture - Commerce
| 1. What is a trade discount? |  |
Ans. A trade discount is a reduction in the list price of a product or service provided by a seller to a buyer. It is given to encourage large quantity purchases or to reward customer loyalty. The trade discount is usually stated as a percentage and is deducted from the list price to calculate the net price.
| 2. What is a cash discount? | |
Ans. A cash discount is a reduction in the invoice price of a product or service provided by a seller to a buyer as an incentive for prompt payment. It is given to encourage the buyer to make payment within a specified time frame. The cash discount is usually stated as a percentage and is deducted from the invoice price if the payment is made within the discount period.
| 3. What is the difference between a trade discount and a cash discount? | |
Ans. The main difference between a trade discount and a cash discount lies in their application and purpose. A trade discount is offered to the buyer at the time of purchase to encourage bulk or large quantity purchases, whereas a cash discount is offered to the buyer as an incentive for prompt payment. Trade discounts are deducted from the list price, while cash discounts are deducted from the invoice price.
| 4. How are trade discounts and cash discounts recorded in accounting? | |
Ans. Trade discounts are not recorded in the accounting books as they are not considered as expenses or revenue. They are simply a reduction in the list price before the calculation of the net price. On the other hand, cash discounts are recorded as a deduction from sales revenue in the income statement if the payment is made within the discount period. In the balance sheet, cash discounts may be recorded as a contra account to accounts receivable.
| 5. How do trade discounts and cash discounts affect the profitability of a business? | |
Ans. Trade discounts can increase the sales volume and market share of a business by attracting customers with lower net prices. This can result in higher overall profitability for the business. Cash discounts, on the other hand, can improve cash flow and reduce the risk of bad debts by encouraging prompt payment from customers. However, cash discounts may also lead to lower profitability if a significant number of customers take advantage of the discount, resulting in lower revenue for the business.
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Nov 15, 2024 Last updated |
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