When any discount is given to the customers against the sales that is called trade discount allowed. Trade discount is normally allowed against a certain quantity of material purchased by the customer from a business firm or against a certain value of the sales made to customer within a particular period. It is immaterial whether the payment of the sales is received immediately or after a certain period.

Accounting treatment of Trade Discount Allowed

Example:- Goods sold to M/s Prime Sales for Rs.25000/=

                     Less: Trade discount allowed to them 10%

The entry will be shown in the books of business firm as follows:-

Debit:-    M/s Prime Sales        Rs.22500/=

Debit:- Trade Discount Allowed Rs.2500/=

Credit:-  Sales A/c                        Rs.25000/=

The Above entry can be shown as follows also:-

Debit:-     M/s Prime Sales          Rs.22500/=

Credit:-   Sales A/c                                Rs.22500/=

In the above example, the first set of entry is very transparent because it shows the sales and trade discount allowed clearly so that the management can take appropriate steps to increase the sales and profitability of the firm.

Treatment of Trade Discount Allowed in Final Accounts

Trade discount allowed is a direct expenditure for a business firm since it is directly relate to sales. Therefore, the trade discount allowed should be shown in expenses side of trading account. Since the trade discount allowed is directly reduced from the sale value, that is why, some time it is not shown separately in trading account. In my view, it should be shown separately because by comparing the trade discount, one can know its effect on sales.