Discounts in the UK

1
Discounts in the UK

• A brief description of terms

2
Types of discount

• Trade discount
• Settlement discount
• Other discounts

3
Trade discount
This term is used to describe a reduction in
price that is offered to regular (trade )
customers. The discount is normally expressed as
a percentage of the usual net price of the
goods. E.g. Goods marked at 100 are offered at a
discount of 10. The revised price is 90 This
becomes the new net price to the customer. VAT is
calculated on the price of 90 The discount of
10 is not recorded as part of the double entry
accounting.
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Settlement Discount
Settlement discount (cash settlement discount) is
a discount that is offered to a customer as an
incentive to pay an invoice quickly. It is
expressed as a percentage with a time limit. For
example, 5 settlement for payment within 7 days.
This means that the customer may take 5 off the
net price of the goods if payment is received
within 7 days of the date of the invoice. An
invoice is received for 200 with a 3 settlement
discount for payment within 7 days. If payment is
made within that period the amount to pay is
194
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Settlement discount and VAT
When an invoice is sent out with settlement
discount the net price is shown as normal. In the
UK it is quite common for the VAT to be
calculated assuming the settlement discount has
been taken. E.g. An invoice for 300 plus VAT is
shown as 5 settlement for payment within 7
days. VAT is calculated on the sum of 285 (the
discounted price). The amount of VAT shown is
49.87
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Recording Settlement Discount.
When the invoice is first recorded the details
are recorded directly from the invoice, so net
and VAT are recorded as on the invoice, and the
total recorded in the debtors or creditors
(according to whether it is a sales or purchase
invoice). No record of the discount is made
until a payment is made. If the discount is then
taken The actual amount received or paid is
entered to the cash book. The amount of discount
is recorded as a double entry. E.g. For a sales
invoice There is a debit to a discount given
account. There is a credit to the debtors account.
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Other discounts
A number of other discounts may be given, but it
may not be clear from the description that it is
a discount. For example, the following are forms
of discount Buy two and get one free. !0 off
everything today 25 off to all new
customers These are rather like a temporary trade
discount. They are not recorded in the double
entry bookkeeping.