When any discount is allowed by any business firm at the time of receipt of any payment from the customers that is called as cash discount allowed. It is an incentive which is given to the person who makes payment on due date of before due date.
For example, M/s XYZ Limited sold the goods for Rupees twenty thousand to M/s Morning Place on 20.05.15. Due date of payment of bill is 20.06.15. In this case M/s Morning Place is supposed to pay this amount on or before 20.06.15 but M/s XYZ Limited have a policy that if the amount of bill is paid same day then M/s Morning Place shall receive a discount of 2% of bill amount. That means if M/s Morning Place pays the bill amount on 20.05.15 then they will have a benefit of Rs.400/= i.e 2% of Rs.20000/=. This amount of Rs.400/= shall be treated as Cash Discount Allowed in the books of M/s XYZ Limited.
Basically, the business firms adopts this type of policy to have the sufficient funds liquidity for working capital purpose. Though, cash discount is the loss for business firm but on other side the firm can make some more useful utilization of funds in comparison of the amount of discount allowed.
Accounting treatment of Cash Discount Allowed
If we take the above example then we find that Rs.20000/= is due from M/s Morning Place. M/s XYZ Limited received Rs.19600/= by cheque and allowed Rs.400/= as cash discount. How this discount will be shown in the books of M/s XYX Limited?
Entry to be Passed
Debit:- Bank A/c Rs.19600/=
Debit:- Cash Discount Allowed A/c Rs.400/=
Credit:- M/s Morning Place Rs.20000/=
Treatment of Cash Discount Allowed in final accounts
Cash discount allowed is an indirect expenses and should be shown in expenses side of profit and loss account.
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