Businesses often reduce prices through discounts. Accounting recognises two kinds, and only one of them is recorded in the books. Knowing the difference early prevents a common muddle.

It also shows that accounting does not copy down every number a business talks about. Some numbers change the price behind the scenes, and only certain events earn their own line in the records.

Trade discount: a reduction off the list price

A trade discount is a reduction off the normal list price, often for buying in bulk or for being in the trade. It is deducted before the sale is recorded, so only the lower, net figure ever appears.

A trade discount is not recorded separately anywhere in the accounts. It simply changes the price.

Think of the list price as a starting figure. A seller might advertise goods at RM1,000 but offer a regular business customer 15% off for a large order. The two sides agree the real price is RM850 (RM1,000 minus RM150).

RM850 is the only number the bookkeeping sees. The RM150 was never a real cost or benefit to record.

It was the gap between an advertised figure and the agreed figure. Recording it would be like writing down the price on a shop sign as well as the price you paid at the till.

Cash discount: a reward for paying promptly

A cash discount is different. It is a reduction offered as a reward for paying quickly, say within 14 days. It depends on when the customer pays, so it is recorded when it happens.

  • If your business gives a cash discount to a customer, it is discount allowed (a cost to you).
  • If a supplier gives your business a cash discount, it is discount received (a benefit to you).

The key word is reward. A cash discount is an incentive, and the business only knows whether it applies once payment arrives. A customer who pays on day 30 gets nothing.

The same customer paying on day 10 earns the discount. Because the outcome depends on what happens later, it becomes a real event with its own entry.

Why only cash discount is recorded

A trade discount just sets the price, so there is nothing extra to record. The books only see the net amount.

A cash discount is a separate event tied to payment, so it needs its own entry. Examiners like to test this difference.

Ask yourself: did the agreed price change, or did a later action earn a reward? If the price was simply set lower from the start, it is a trade discount and it disappears into the net figure. Suppose the customer or the business did something, such as paying early, and got a benefit for it. That is a cash discount, and accounting records that benefit or cost.

Discount allowed and discount received

Discount allowed and discount received are the same event seen from opposite sides of a deal. When one business allows a cash discount, the business paying it records a discount received.

Discount allowed reduces the money your business collects, so it behaves like an expense. Discount received reduces the money your business pays out, so it behaves like income. Beginners often mix them up.

The trick is to ask who is giving the reward. If your business hands the reward to a customer, it is allowed. If your business enjoys the reward from a supplier, it is received.

A worked example with both

A supplier lists goods at RM2,000 and gives your business a 20% trade discount. The trade discount is 20% × RM2,000 = RM400, so the goods are agreed at RM1,600.

That RM1,600 goes into the purchases records. The RM400 is never written down.

The supplier then offers a 2.5% cash discount if you pay within 14 days. If you pay early, the cash discount is 2.5% × RM1,600 = RM40, recorded as discount received.

So one deal can involve both discounts. The trade discount sets the price at RM1,600, and the RM40 cash discount appears in the books only because you chose to pay promptly. These figures are invented to show the method.

A common mistake

A frequent slip is working out the cash discount on the original list price instead of the net price after trade discount. Always apply trade discount first, then work the cash discount on what remains. In the example above, the RM40 came from RM1,600, not from RM2,000.

Why it matters

Understanding discounts early builds two habits you will use throughout the subject: knowing which events deserve a record, and reading a transaction carefully before touching the books. These help later with the matching concept, with credit transactions, and with preparing accounts that include only what belongs there.

A quick way to remember

  • Trade discount → changes the price → not in the books.
  • Cash discount → rewards early payment → is in the books (allowed or received).

Try it yourself

Exercise: A supplier lists goods at RM1,000, gives a 10% trade discount and offers a 2% cash discount for early payment. What amount is recorded as the purchase, and what happens to the cash discount if taken?

Show the answer
  • Trade discount: 10% × 1,000 = 100, so the purchase is recorded at RM900 (the net figure). The trade discount itself is not recorded.
  • If the 2% cash discount is taken on RM900 (= RM18), it is recorded as discount received.

Discounts connect to buying and selling, so revisit purchases and sales. If you want this to click, one of our teachers can work through discount questions with you step by step.

We start with whichever part feels least clear. Book a trial class.