Chapter 4 : Double Entry Recording

Question 1

Define trade discount

Answer 1

Trade discount is a reduction to the list price of goods

Question 2

State the purpose of a trade discount

Answer 2

Trade discount is given to encourage bulk purchase, customer patronage and customer loyalty.

Question 3

Define cash discount

Answer 3

Cash discount is a reduction to the invoice price of goods

Question 4

State the purpose of cash discount

Answer 4

Cash discount is given to encourage prompt payment by customers withina specified time.

Question 5

State the differences between a trade discount and a cash discount.

Answer 5

• Trade discount is a reduction to the list price of goods while cash discount is a reduction to the invoice price of goods
• Trade discount is given to encourage bulk purchase, customer patronage and customer loyalty while a cash discount is given to encourage prompt payment by customers within a specified time
• Trade discount is not recorded in the ledger while cash discount is recorded in the ledger as discount allowed or discount receieved.

Question 6

State the differences between discount allowed and discount received

Answer 6

• Discount allowed is given by the business to credit customers when the credit customers pay early while discount recevied is given by the credit suppliers to the business when the business pays early
• Discount allowed is recorded as an expense and will decrease profit while discount received is recorded as an income and will increase profit