Cash Discount

Prerequisites: Module 16 — Trade Discount

Learning Objectives

By the end of this module, you will be able to:

• Distinguish between cash discount and trade discount
• Record Discount Allowed when receiving early payment from a customer
• Record Discount Received when making early payment to a supplier
• Explain the GST treatment of cash discounts

What Is Cash Discount?

A cash discount (also called a settlement discount or early payment discount) is a reduction in the invoice amount offered in exchange for early payment. Unlike trade discount (given at invoice time), cash discount is given after the invoice has been raised.

Typical terms you'll see:

• "2/10 net 30" — 2% discount if paid within 10 days; full amount due in 30 days
• "1% 7 days" — 1% off if paid within a week

Cash discounts serve two purposes:

1. For the seller: Get cash faster, reduce debtor risk
2. For the buyer: Save money on purchases if you have the cash

Why Cash Discount IS Recorded (Unlike Trade Discount)

Two Scenarios

Scenario A: Discount Allowed (Seller's Books)

When Sunrise Retail gives a discount to a customer for early payment:

• It is an expense for Sunrise Retail — they receive less money
• Recorded as: Discount Allowed (Indirect Expense)

Entry when customer pays early with discount:

Dr  Bank/Cash A/c           (amount received)
Dr  Discount Allowed A/c    (discount given — expense)
    Cr  Customer's A/c          (full invoice amount)

Scenario B: Discount Received (Buyer's Books)

When Sunrise Retail gets a discount from a supplier for early payment:

• It is income for Sunrise Retail — they pay less money
• Recorded as: Discount Received (Indirect Income)

Entry when Sunrise Retail pays early with discount:

Dr  Supplier's A/c          (full invoice amount)
    Cr  Bank/Cash A/c           (amount paid)
    Cr  Discount Received A/c   (discount earned — income)

GST Treatment of Cash Discounts

Important: GST is calculated on the original invoice value — not on the discounted settlement amount.

When a customer pays early and gets a 2% cash discount:

• GST was already charged on the full invoice value
• The discount reduces the base amount only — NOT the GST amount
• If the discount changes the GST base, a Credit Note must be issued

In most practical cases for B2B transactions:

• If the discount is agreed in writing at invoice time → reduce base, reduce GST (like trade discount)
• If the discount is given later on payment → discount is on base only, GST doesn't change

For Sunrise Retail's scenarios below, we apply discount to the base amount only (not on GST).

Sunrise Retail — Case Study Application

💼 Sunrise Retail Pvt Ltd — Cash Discount Scenarios

Scenario 1: Digital Hub Pays Early — Discount Allowed (Apr 18)

Background: Digital Hub's invoice dated April 10:

• Base: ₹4,80,000 | CGST: ₹43,200 | SGST: ₹43,200 | Total: ₹5,66,400
• Credit period: 15 days (due April 25)

Early payment terms: Sunrise Retail offers 2% discount if paid within 8 days (by April 18).

Digital Hub pays on April 18 — qualifies for 2% discount on base amount.

Calculation:

Journal Entry — April 18 (in Sunrise Retail's books):

What happened: Digital Hub's account (₹5,66,400 debit) is fully cleared. Sunrise Retail's bank gets ₹5,56,800. The ₹9,600 difference is recorded as Discount Allowed — an expense in the P&L.

Scenario 2: Sunrise Retail Pays TechWorld Early — Discount Received

Background: TechWorld invoice (April 5):

• Original outstanding (opening) to TechWorld: ₹1,80,000
• Terms offered by TechWorld: Pay within 10 days of invoice, get 1% settlement discount on the outstanding balance

Sunrise Retail pays the ₹1,80,000 on April 12 (within 10 days of the opening balance being due).

Calculation:

(Note: This is on the old pre-GST opening balance. The opening balance of ₹1,80,000 represents goods purchased in March — it's the full invoice amount including original GST already settled.)

Journal Entry — April 12:

What happened: TechWorld's account is fully cleared (Dr ₹1,80,000). Sunrise Retail pays only ₹1,78,200. The ₹1,800 saved is Discount Received — income in the P&L.

Scenario 3: Discount Received on April 5 Purchase

Later, Sunrise Retail also settles the new April 5 purchase (₹14,16,000) early. TechWorld gives 0.5% discount on the base amount.

Calculation:

Journal Entry:

Recording in Tally

In Tally, receipt and payment vouchers support discount entries directly:

Receipt Voucher (F6) with Discount — Digital Hub payment:

Gateway → Accounting Vouchers → F6 (Receipt)
Date: 18-Apr-2025

Dr: SBI Current Account — ₹5,56,800
Dr: Discount Allowed — ₹9,600
    Cr: Digital Hub Retail — ₹5,66,400

Tally automatically clears Digital Hub's full outstanding when you enter the receipt with the discount line.

Practice Exercise

Exercise 1: Sparsh Tech Solutions supplies 20 phones to Sunrise Retail at ₹11,500 each on credit (CGST+SGST 9% each). Invoice total = ₹2,72,900. Sparsh offers 1.5% settlement discount on the base if paid within 7 days.

Sunrise Retail pays on Day 5. Calculate and record the payment entry.

Exercise 2: Tech Park Retail Store owes Sunrise Retail ₹5,49,408 (May order from Module 16 — 30 phones with 3% trade discount). Sunrise Retail offers 1% early payment discount on the base if Tech Park pays within 10 days. Tech Park pays on Day 8.

Original base was ₹4,65,600. Calculate and record the receipt.

Key Terms

Module Summary

• Cash discount is given for early payment — ALWAYS recorded as income or expense (unlike trade discount)
• Discount Allowed = Sunrise Retail gives discount to customer → Indirect Expense (Dr Discount Allowed, Cr Customer)
• Discount Received = Supplier gives discount to Sunrise Retail → Indirect Income (Dr Supplier, Cr Discount Received)
• GST is charged on the original invoice value — cash discount reduces only the base, not the GST
• Digital Hub paid early: Sunrise Retail allowed ₹9,600 discount; received ₹5,56,800 instead of ₹5,66,400
• In Tally, both the receipt amount and the discount line can be entered in a single Receipt/Payment voucher

Quick Quiz

1. Sunrise Retail receives ₹5,56,800 from Digital Hub who got 2% early payment discount. The entry is:
   • a) Dr Bank ₹5,56,800, Cr Digital Hub ₹5,56,800 (write off the ₹9,600)
   • b) Dr Bank ₹5,56,800, Dr Discount Allowed ₹9,600, Cr Digital Hub ₹5,66,400
   • c) Dr Bank ₹5,66,400, Cr Digital Hub ₹5,56,800, Cr Discount Received ₹9,600
   • d) Dr Digital Hub ₹9,600, Cr Discount Received ₹9,600

2. Discount Received appears in Sunrise Retail's P&L as:
   • a) An expense — reduces profit
   • b) An income — increases profit
   • c) Does not appear in P&L — goes directly to Balance Sheet
   • d) Reduces the purchase cost directly

3. Which account's balance is cleared completely when Digital Hub pays ₹5,56,800 (with ₹9,600 discount)?
   • a) SBI Current Account
   • b) Digital Hub Retail
   • c) Discount Allowed
   • d) Sales A/c

4. Under GST, when cash discount is given on payment, GST is:
   • a) Recalculated on the discounted amount
   • b) Charged on the original invoice base — not reduced by cash discount
   • c) Zero-rated when discounts are given
   • d) Calculated on the discount amount separately

Next: Module 18 — Interest Calculation — TechWorld charges 18% p.a. on Sunrise Retail's overdue ₹1,80,000 opening balance; learn to calculate the charge and configure Tally's built-in interest feature to track it automatically.