It is main business strategy followed by companies to increase their revenue.
Companies will increase their sales by allowing discounts to their customers.
Trade discount is reduction from whole goods value, example this discount manufacturer gives to wholesaler when they buy more products, and the manufacturer will give a discount based volume of purchases of goods like, 30% or 40% discount.
Payment terms based discount
This discount is different when you compare with the trade discount.
As per terms and conditions mentioned in the purchase order supplier allow discount to buyer when payment made by the buyer before the due date.
X sold goods to Y worth of Rs. 20,000/- and payment terms are 30 days from the date invoice.
Now, X allows 5% discount to Y, when he will make payment before 15 days from the due date.
In X books of accounts
Bank A/c Dr 19,000
Discount Allowed Dr (Expenses) 1,000
To Y A/c 20,000
In Y books of accounts
X A/c Dr 20,000
To Discount Received (Income) 1,000
To Bank 19,000
Discount received will appear in profit & loss account statement credit side, discount received by the buyer when seller allow discount.
Generally discount allowed by the supplier when transaction happened on credit basis, such as trade discount, early payment discounts and high volume purchase discounts.