Definition of Cash Discount
Cash discount is deduction from purchase price of customer, if he pay within time or before time. In other words, it is encourage to buyer for buying with cash rather than buying on credit.
Suppose, According to terms, if any buyer will pay the purchase price within 30 days of XYZ company products. Then company will deduct 20% from his purchased price, and then this deduction or discount will be cash discount.
Benefits for providing Cash Discount
1. It improves cash flow or liquidity.
2. It also increases ability to pay because buyer sees discount as income so, he will surely to pay and its effect will on his ability to pay.
3. Sometime cash discount is helpful for good bargaining with seller.
Accounting Treatment of Cash Discount
Cash discount must be recorded both vendor and buyer’s day book. In Vendor book, it is treated as discount allowed and this cash discount will become loss of business and in the day book of buyer, it will become discount received account which income account.
Suppose Ram has sold goods to Sham on Credit of Rs. 50000 and it is the term of agreement that if Sham pays within 20 day of this purchase, he can receive 10% discount. If Sham pays within 20 days then Treat cash discount in day book of both parties.
Day book of Seller ( Ram )
Bank Account Dr. 45000
Discount Allowed Account Dr. 5000
Sham Account Cr. 50000
Day book of Buyer ( Sham )
Ram Account Dr. 50000
Bank Account Cr. 45000
Discount Received Account Cr. 5000