As the name itself clarifies that when any discount is received against any payment made by the business firm, that is called ‘Cash Discount Received’. When any payment is made by the business firm to any person and the receiver of money gives some incentives for such timely payments then it shall be treated as ‘Cash Discount Received’ Normally, in business firms the term ‘Cash Discount Received’ is used in respect of cash purchases of goods.
For example, M/s XYZ Limited Purchased the goods for Rupees twenty thousand From M/s Gift House on 20.05.15. Due date of payment of bill is 20.06.15. In this case M/s XYZ Limited is supposed to pay this amount on or before 20.06.12 but M/s Gift House have a policy that if the amount of bill is paid same day then M/s XYZ Limited shall receive a discount of 2% of bill amount. That means if M/s XYZ Limited 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 Received in the books of M/s XYZ Limited.
This policy is beneficial for those firms who have surplus money lying with them. They can utilize their money in best possible manner.
Accounting treatment of Cash Discount Received
If we take the above example then we find that Rs.20000/= is due to M/s Gift House. M/s XYZ Limited pays Rs.19600/= by cheque and receives Rs.400/= as cash discount. How this discount will be shown in the books of M/s XYZ Limited?
Entry to be Passed
Debit:- M/s Gift House Rs.20000/=
Credit:- Bank Account Rs.19600/=
Credit:- Cash Discount Received Account Rs.400/=
Treatment of Cash Discount Received Account in final accounts
Cash Discount Received is an indirect income for the business firm. That is why it is shown in income side of profit and loss account.
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