Buying and Selling:

Trade Discounts and Cash

Discounts
Trade Discounts
• To entice the buyers, sellers usually offer
trade discounts.
▫ It could be a single trade discount or a
series of discounts.
▫ It is generally wholesalers who offer trade
discounts, but there are also some retailers
who offer them.
Trade Discounts
• A trade discount is a reduction from list
price granted to buyers.
▫ It could take the form of volume discounts
for large purchases, dealer or distributor’s
discounts, or special discounts granted at
the discretion of the seller.
▫ Trade discounts could either be a single
discount or a series of discounts.
Trade Discounts
• In accounting, trade discounts are not
recorded because accounting records
reflect only the net invoice prices, that is,
sales and/or purchases are recorded net
of trade discounts.
▫ For example, if the merchandise listed at
₱1,000.00 is sold subject to a 10%
discount, the seller records the sale of
₱900.00 only, the net invoice price.
Similarly, the buyer will record the same as
a purchase of ₱900.00.
Single Discount
• Computing for discounts makes use of our
basic percentage formula P = BR where
the base is the list price, the rate is the
discount rate, and the percentage is the
discount. As such:

P = BR

Discount = List Price x Discount Rate

Single Discount: an Example
• Compute the discount for an item with a list price of
₱1,250.00 subject to a 15% discount. What is its net
invoice price (NIP)?
Given: List Price = ₱1,250.00; Discount Rate = 15%
Find: Net Invoice Price (NIP)
Solution:
Discount = List Price x Discount Rate
= ₱1,250.00 x 15%
= ₱187.50

Net Invoice Price = List Price - Discount

= ₱1,250.00 - ₱187.50
= ₱1,062.50
Single Discount: an Example
• Another way of computing for the net invoice price is to
multiply the list price by the net invoice price rate. The
net invoice price rate is equal to 100% less the discount
rate. Thus:

Net Invoice Price (NIP) rate = 100% - Discount rate

NIP rate = 100% - 15%
NIP rate = 85%

Net Invoice Price (NIP) = List Price x NIP rate

= ₱1,250.00 x 85%
= ₱1,062.50
Single Discount: an Example
• To get the discount, we deduct the net
invoice price from the list price:

Discount = List price - Net invoice price

= ₱1,250.00 - ₱1,062.50
= ₱187.50
Series of Discount
• In certain instances, a seller grants
additional discounts other than the
discount ordinarily given by him or her.
▫ For instance, aside from the regular 10%
discount, a seller may grant a special
additional discount of 5%. The series of
discounts is, therefore 10% and 5%. This is
not, however, equivalent to 15%.
Series of Discount: an Example
• Example: Compute the discount and net
invoice price of an item listed at
₱1,250.00 which is given a 10% and 5%
discount.

Given: List Price: ₱1,250.00

Discount rates: 10% and 5%
Find: (a) Discount and (b) Net Invoice
Price
Series of Discount: an Example
• Solution:
• Method 1: We first multiply the list price
by the first discount rate. To get the
second discount, multiply the difference
between the list price and the first
discount, and the second discount rate.
We then deduct the second discount from
the said difference to get the net invoice
price.
Series of Discount: an Example

• Our total discount is equal to the first discount plus

the second discount:

Total discount = ₱125 + ₱56.25 = ₱181.25

Series of Discount: an Example
Method 2:
• Deduct the first discount rate from 100% and
multiply the list price by the rate obtained.
100% - 10% = 90%
• Multiply the list price by the first balance rate
obtained in step (1):
₱1,250.00 x 90% = ₱1,125.00
• Deduct the second discount rate from 100% and
multiply the first balance obtained in (1) by the
second balance rate obtained:
100% - 5% = 95%
₱1,125.00 x 95% = ₱1,068.75 → Net Invoice Price
Series of Discount: an Example
• This method involves a process similar to the use of
the net invoice price rate (NIP rate) applied to the
list price to get the net invoice price. Our discount
is still equal to the list price less the net invoice
price.

Discount = List Price - Net Invoice Price

= ₱1,250.00 - ₱1,068.75
= ₱181.25

• We obtained the same result as we got in Method

1.
Series of Discount: an Example
Method 3: Using this method, we will convert
the series of discounts to a single equivalent
rate.
• Deduct the series of discounts individually by
100%.
100% - 10% = 90%
100% - 5% = 95%
• Multiply the resulting products by themselves
to give us the net invoice price (NIP) rate.

(a) x (b) = 90% x 95% = 85.5% → NIP rate

Series of Discount: an Example
• Deduct this NIP rate from 100% to get the single
equivalent discount rate.
100% - 85.5% = 14.5% → Single Equivalent Discount Rate
• Take note that if we add the NIP rate and the
single equivalent discount rate, we will get 100%.
• To get the discount, we multiply the single
equivalent discount rate by the list price:
Discount = List Price x Single Equivalent Discount Rate
= ₱1,250.00 x 14.5%
= ₱181.25
Series of Discount: an Example
• To get the net invoice price, we multiply
the list price by the net invoice price
(NIP) rate obtained in step (3):
• Net Invoice price = List Price x NIP rate
• = ₱1,250.00 x 85.5%
• = ₱1,068.75
Cash Discounts
• Cash discounts, unlike trade discounts,
are recorded in the accounting records
either as sales discounts in the books of
the seller or purchases discounts in the
books of the buyer.
▫ These are deductions from the recorded
net invoice prices.
▫ These are also granted to buyers to
encourage prompt payment of accounts.
Cash Discounts
• For a term of sale of the means that
a 2% discount is granted if payment is made
within 10 days, the discount period, from date
to invoice. The means that the net invoice
price is payable in 30 days, the credit period.
▫ Assuming, therefore, a net invoice price of
₱1,000.00, if paid within 10 days from the date
of purchase, the cash discount is 2% of
₱1,000.00 or ₱20.00. The amount payable is
the net invoice price of ₱1,000.00 less than
₱20.00 cash discount or ₱980.00.
Terms of Sale or Purchase
• The ratio of cash discount is shown under the
terms of payment granted by the seller to the
buyer. These terms of sale or purchased are
expressed as …
• The cash discount is the sales discount,
means that the buyer has to pay the net
invoice price by the end of the month of
purchase; means the buyer has 45 days
from the date of purchase to pay his or her
account. These terms do not grant cash
discounts.
Take note the following terms of
payment:

• This is read “two ten, n thirty,” which means

the buyer gets a 2% discount if he or she pays
within 10 days from the invoice date. If the 10-
day period has elapsed, the buyer will be given
30 days from the date of the invoice within
which to pay his or her account without
additional charges. This 10-day period is called
the discount period, and the 30-day period is
called the credit period.
Take note the following terms of
payment:

• This is read “three ten, two fifteen, n

sixty.” It means that the buyer will be given
3% discount if he or she pays within 10 days
from the date of invoice; 2% discount if he or
she pays within 15 days from the invoice date;
or if he or she failed to take advantage of the
discounts being offered, he or she has to pay
within 60 days from the date of invoice.
Computing for Discount Period and
Credit Period: Example 1
• To compute for the deadlines for the
discount and the credit periods, let us
study the following example:
Computing for Discount Period and
Credit Period: Example 1
• To solve for the deadline for the discount period, we count
10 days from March 2; hence we get March 12:
Date of Invoice: March 2
Discount Period: 10 days
Deadline for the Discount Period: March 12
• To solve for the deadline for the credit period, we count 30
days from March 2. We cannot simply add 30 + 2 since most
number of days in a month are 31. As such, we do the
following;
March has 31 days
Less Invoice date: 2
Number of days in March: 29
April 1 → Deadline for the credit period
Current period: 30
Computing for Discount Period and
Credit Period: Example 1
• We first deduct the invoice date from the number
of days in March which is 29. Then, we subtract
29 from 30 to get April 1, the deadline for the
credit period.
• If the buyer pays between March 2 and March 13,
that is, up to March 12, he or she gets the 2%
discount. If he or she pays on March 13 or later,
he or she gets no discount because the discount
period has lapsed. To pay the account, the buyer
has until April 1, the deadline of the credit period.
Computing for Discount Period and
Credit Period: Example 2

• To solve for the deadline for the discount

period:
Computing for Discount Period and
Credit Period: Example 2
• To solve for the deadline for the credit
period:
Computing for Cash Discounts
• To compute for cash discounts, we simply
multiply the net invoice price by the cash
discount rate. Let us study the following
example:
Net Invoice Price = ₱3,060.00
Invoice date: March 2
Term:
Find: (a) Cash discount; (b) Net amount due
Computing for Cash Discounts
Solutions:
(a) Cash Discount = NIP x Cash Discount Rate
= ₱3,060.00 x 3%
= ₱61.20
(b) Net Amount Due = NIP - Cash Discount
= ₱3,060.00 - ₱61.20
= ₱2,998.80
• The foregoing implies that if the buyer pays not
later than March 12, then he or she only pays
₱2,998.80 instead of ₱3,060.00. Beyond March
12, he or she pays the ₱3,060.00.
Questions???

30