Question

1. Selected account balances brought forward on 1/1/2014 in the ledger of P. Scott, a sole trader are as follows: Balances as at 31 December 2013 £ Bank 1,750.00 overdrawn VAT 50.00 owed by HMRC Purchases 2,750.00 Sales 12,500.00 C Evans 500.00 dr T Andrews 300.00 cr Discount allowed 75.00 Discount received 50.00 During January the following transactions were recorded: January 2 A cheque for £460.00 was received from C Evans in full settlement of her debt. The rest is to be treated as a discount January 3 An invoice was received from T Andrews for £800.00 plus VAT January 6 Invoice was raised for £600.00 inclusive of VAT for C Evans January 8 P Scott pays T Andrews £1,200.00 in full settlement of his account. The balance is to be treated as a discount January 14 P. Scott takes £900.00 out of the bank for his own personal use January 21 P. Scott purchases a new photocopier from Xyes Ltd for £1,800.00 plus VAT.

a) Open all accounts that are necessary to record the above transactions and enter the balance brought forward from the previous accounting period. All credit balances must be shown in brackets.

b) Post necessary entries in the relevant accounts to record transactions, ensuring that you account correctly for any discounts and VAT.

c) Explain the difference between trade and cash discount and how they are treated in the accounts.

Answer 1

C) Trade Discount v/s Cash Discount:

• Trade discount is the discount, given by the seller to the buyer at the time of purchase of goods, as a deduction in the list price of the quantity sold. There is no record maintained in the books of both the buyer and seller for trade discount.
• Cash Discount is the discount, allowed to customers by the seller at the time of making the payment of purchases, as a reduction in the invoice price of the commodity. A cash discount is used to facilitate a prompt payment from the customers. Both the buyer as well as the seller keep a proper record of such discount in their books of accounts