Accounting Opinion About Cash Discounts and Trade Discounts free essay sample

Year end: Mr. Williams 4 weeks Accounting v IFRS v US GAAP AASB IFRS for SME / Differential Reporting Standards Auditing Ethics Other (specify): 30 April, 2012 30 June, 2012 Prepared for (name of supervisor): Time spent on this opinion: What type of opinion (select options)? Accounting Standards applied: Query or issue: Whether the debit-balance account â€Å"Cash Discounts† in the Statement of Comprehensive Income should be treated the same way as the â€Å"Trade Discounts† account. Background and pertinent facts: Trade discount is allowed by the supplier of the goods to the purchaser when he buys from the supplier in bulk quantities. The purchaser is accountable for the invoice price which is the list price less the trade discount. Whereas, cash discount (also known as sales discount) is a decrease granted by supplier from the invoice price of the goods in order to encourage prompt payment. Authoritative Guidance and Research: AASB 101 Presentation of Financial Statements IAS 18 Revenue (IAS 18. We will write a custom essay sample on Accounting Opinion About Cash Discounts and Trade Discounts or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 0) http://www. e-conomic. co. uk/accountingsystem/glossary/cash-discount http://www. letslearnfinance. com/difference-between-cash-and-trade-discount. html http://accountingexplained. com/financial/receivables/cash-discount-on-sales http://basiccollegeaccounting. com/2008/08/summary-of-difference-between-cash-discount-and-tr ade-discount/ Discussion and Analysis: Trade discount is given before the exchange happens; therefore, the amount recorded as sales revenue is the invoice price. Hence, there is no entry in the books of the account. Sales should be recorded after the deduction of such trade discounts. Unlike trade discount, cash discount is allowed on the payment of money after the invoice is made by the supplier; therefore, the cash discount is not shown on the invoice. In order to indicate the difference of amount between the sales revenue and the cash received, a cash discount account should be opened on the ledger. There are two methods of accounting for sales that offer cash discounts: the gross method and the net method. Once one method is chosen, it would be used to record all sales according to this method. The gross method records sales and Accounts Receivable at their gross amount and the discounts are recorded only when they are taken. The following journal entries should be recorded for the sale and for the full invoice amount payment: Dr. Accounts Receivable Cr. Sales Dr. Cash Dr. Sales Discounts Cr. Accounts Receivable IAS 18 Revenue requires cash discounts to be treated as reductions in revenue; thus, this special Sales Discounts account should be subtracted from Sales to calculate net sale. The net method puts forward a special revenue account Sales Discounts Forfeited. At the time of sale, sales and receivables are recorded net of possible discounts: Net Price = Gross Price ? Potential Cash Discount Thus, the journal entry at the time of sale is like: Dr. Accounts Receivable (Net Price) Cr. Sales (Net Price) If the payment is received within the time that was entitled on the invoice and the discounts are taken by the purchaser, it should be recorded as: Dr. Cash (Net Price) Cr. Accounts Receivable (Net Price) If the discounts are not taken, the amount is debited to Account Receivable and credited to Sales Discounts Forfeited which is calculated into an â€Å"other revenue† account that appears on the Income Statement. The journal entry should be recorded as: Dr. Cash (Gross Price)