When the discount is received on the purchase of goods then it will be called as trade discount received. It is immaterial in this case whether the payment against purchases is made at the time of purchase or the payment is made in future. Therefore, this is totally different from cash discount.

Net billing of purchase is always reduced by the trade discount received. The net purchases can also be shown in the books but it is advisable to show the trade discount received separately so that certain decision can be taken by the management for the benefit of the firm after making the comparison of trade discount and purchases.

Accounting treatment of Trade Discount Received

Example:- The goods purchased from M/s Morning Place for        Rs.50000/=

Less:- Trade discount received 10%

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

Debit:-           Purchase A/c                       Rs.50000/=

Credit:-        M/s Morning Place                                     Rs.45000/=

Credit:-        Trade Discount Received                          Rs.5000/=

If the business firm does not want to show the entry of trade discount received separately, in that case the following entry will be made in the books of the firm:-

Debit:-            Purchase A/c             Rs.45000/=

Credit:-          M/s Morning Place        Rs.45000/=

Treatment of Trade Discount Received in Final Accounts

Trade discount is a direct income because it affects directly the cost of purchase. Therefore, it should be shown in income side of trading account or should be shown as purchase minus trade discount received.