Discounts in Accounting: Trade and Cash Discounts Explained

Lesson Plan: Discounts

Subject: Financial Accounting
Class: SS1
Term: 1
Week: 11
Age: 15-16 years
Topic: Discounts
Sub-topic: Meaning, Types, Reasons for Giving Discounts, Calculation of Discounts
Duration: 1 hour
Behavioral Objectives:
By the end of the lesson, students should be able to:

1. Explain the term “discount” and identify the different types of discounts.
2. State the features of each type of discount.
3. Justify the reasons why businesses give discounts.
4. Calculate the amount of discount granted on a transaction.

Keywords

• Discount: A reduction in the price of a product or service, typically offered to encourage purchasing or reward loyalty.
• Trade Discount: A reduction in price offered to customers, usually based on the volume of purchase or as part of a promotional offer.
• Cash Discount: A reduction in price offered to customers as an incentive for early payment.
• Invoice: A document showing the amount due for goods or services purchased.
• Calculation: The process of determining the amount of discount applied to a transaction.

Set Induction (5 mins)

The teacher will ask the students if they have ever received a discount on a purchase and how it was calculated. This will lead to a discussion on why businesses offer discounts to customers and how discounts impact the final price of goods or services.

Entry Behavior

Students should have basic knowledge of business transactions, sales, and purchases, as well as the concept of price reduction.

Learning Resources and Materials:

• Chalkboard/Whiteboard
• Calculator
• Sample business transactions with discounts
• Projector (if available) for examples

Reference

• Lagos State Scheme of Work for Financial Accounting.
• “Principles of Financial Accounting” by Jerry J. Weygandt.

Building Background/Connection to Prior Knowledge:

Students should recall concepts like buying and selling goods, where discounts might be applied. They can connect this to how businesses offer reduced prices to encourage sales or reward loyal customers.

Embedded Core Skills:

• Numeracy Skills: Applying mathematical formulas for calculating discounts.
• Critical Thinking: Evaluating the reasons businesses provide discounts and their impact on profits.
• Problem Solving: Solving problems involving the calculation of trade and cash discounts on transactions.

Learning Materials:

• Discount calculation worksheets
• Business transaction examples
• Discount charts for reference

Instructional Materials:

• Whiteboard and markers
• Projector (for demonstration purposes)
• Calculator
• Sample transaction sheets

Content:

1. What is a Discount?
   • A discount is a reduction in the price of goods or services. Discounts are usually given to encourage sales, reward customers, or reduce inventory.
2. Types of Discounts:
   • Trade Discount: A reduction in price given by the seller to the buyer, typically for bulk purchases or based on the buyer’s status as a wholesaler or retailer. Trade discounts are usually given as a percentage off the list price.
   • Cash Discount: A reduction in price offered to the buyer for prompt payment of an invoice. Cash discounts are typically offered to encourage early payment and improve cash flow. They are usually expressed as a percentage of the invoice amount.
3. Features of Each Type of Discount:
   • Trade Discount:
     • Given on the listed price of the goods.
     • Not recorded in the books of accounts directly; it’s deducted from the selling price before the transaction is recorded.
     • Usually offered to wholesalers or retailers.
     • Typically a percentage of the catalog or list price.
   • Cash Discount:
     • Given after the goods have been sold, provided that payment is made within a specific time frame.
     • Recorded in the books of accounts.
     • Encourages prompt payment and improves liquidity for businesses.
     • Often expressed as a percentage (e.g., 2% for payment within 10 days).
4. Reasons for Granting Discounts:
   • To Encourage Sales: Discounts are often offered to attract customers and stimulate sales, particularly during off-seasons or sales promotions.
   • To Reward Loyal Customers: Businesses might offer discounts to customers who make repeat purchases or maintain a strong business relationship.
   • To Clear Inventory: Discounts can be offered on old stock to make room for new inventory, especially at the end of a season.
   • To Encourage Prompt Payment: Cash discounts are offered to ensure timely payments from customers and improve cash flow for the business.

Presentation Steps:

Step 1: Revision of Previous Topic (5 mins)
The teacher will review basic business transactions such as sales and purchases. Students will be asked to recall situations where discounts may be given.

Step 2: Introduction of New Topic (15 mins)
The teacher will define discount and explain the different types, features, and reasons for granting them. The teacher will then introduce discount calculations with simple examples. Students will work through a sample problem as a class.

Step 3: Student Contributions and Corrections (15 mins)
Students will be given various problems involving trade and cash discounts. They will calculate the discounts on their own, with the teacher providing guidance and corrections as needed.

Teacher’s Activities:

• Define and explain the different types of discounts.
• Provide examples and step-by-step demonstrations on how to calculate trade and cash discounts.
• Distribute practice problems for students to solve individually or in pairs.
• Provide guidance during class activities and correct mistakes.

Content

1. Meaning of Discount

A discount is a reduction in the selling price of goods or services. It is usually offered to encourage sales or reward certain behaviors, such as early payment. Discounts can be given as a percentage or a fixed amount.

2. Types of Discounts

There are two main types of discounts:

• Trade Discount: This is a reduction in the list price of goods offered to customers. It is usually based on the volume of purchase or for promotional purposes.
  • Feature: It is not recorded separately in accounting books; the sale is recorded at the net amount after the discount.
  • Example: A wholesaler offers a 10% trade discount on an order worth ₦5,000, making the new price ₦4,500.
• Cash Discount: This is a discount given to customers as an incentive to pay early, usually within a specific period.
  • Feature: It is recorded separately in the accounting books, often in the “Discount Allowed” or “Discount Received” accounts.
  • Example: A supplier offers a 5% cash discount for payment within 30 days. If the invoice is ₦10,000, the discount would be ₦500 if paid on time.

3. Reasons for Granting Discounts

• Encourage Early Payment: Cash discounts motivate customers to pay their invoices quickly, improving cash flow for the business.
• Increase Sales Volume: Trade discounts encourage customers to buy in larger quantities.
• Customer Loyalty: Discounts help build long-term relationships by offering incentives to regular customers.
• Promotions and Special Offers: Businesses offer discounts during sales periods or special events to attract customers.

4. Calculation of Discounts

To calculate a discount, you multiply the amount of the transaction by the discount rate.

• Formula for Calculating Trade Discount:
  $\text{Discount Amount}=\text{List Price}\times \text{Discount Percentage}$
• Formula for Calculating Cash Discount:
  $\text{Discount Amount}=\text{Invoice Amount}\times \text{Cash Discount Percentage}$

Fill-in-the-Blank Questions

1. A _______ discount is offered as an incentive to pay early.
   a. Trade
   b. Cash
   c. Promotional
   d. Seasonal
2. The _______ discount is usually based on the volume of purchase.
   a. Trade
   b. Cash
   c. Percentage
   d. Quantity
3. To calculate the discount on a transaction, you multiply the _______ by the discount percentage.
   a. Quantity
   b. Invoice amount
   c. Total expenses

Learner’s Activities:

• Participate in class discussions and share their experiences with discounts.
• Solve problems on discount calculation using the formulas provided.
• Ask questions for clarification when necessary.

Class Activity Discussion (FAQs):

Frequently Asked Questions (FAQs):

1. What is a discount, and why do businesses offer it?
   Answer: A discount is a reduction in the price of goods or services, offered to encourage purchases, reward loyalty, or incentivize prompt payment.
2. What is the difference between a trade discount and a cash discount?
   Answer: A trade discount is given at the time of the sale, usually for bulk purchases or to certain types of customers (like wholesalers), while a cash discount is given to encourage prompt payment after the sale.
3. How do you calculate a trade discount?
   Answer: The trade discount is calculated by multiplying the list price by the discount percentage and then subtracting it from the list price to get the final price.
4. What are the reasons a business might grant a discount?
   Answer: Businesses give discounts to encourage sales, reward loyal customers, clear old stock, and encourage early payments.
5. Can a customer receive both a trade and a cash discount?
   Answer: Yes, a customer can receive both a trade and a cash discount, as long as the conditions for each discount are met (e.g., buying in bulk and paying early).
6. How is a cash discount different from a trade discount in terms of calculation?
   Answer: A cash discount is calculated on the amount due after the sale, while a trade discount is applied to the list price before the sale.
7. Why do businesses offer discounts for early payment?
   Answer: Discounts for early payment help improve the business’s cash flow by encouraging customers to pay invoices faster.
8. What is the impact of trade discounts on sales records?
   Answer: Trade discounts are not recorded separately in the books; instead, the discounted price is recorded as the sales price.
9. How do cash discounts impact the final payment amount?
   Answer: Cash discounts reduce the amount that the customer has to pay if they settle their invoice within the specified time frame.
10. Are discounts always given in percentage terms?
    Answer: Discounts are often given as a percentage, but they can also be specified as a fixed amount or a value reduction on the price.

Objective Questions (15 Fill-in-the-Blank Questions with Options a, b, c, or d):

1. A __________ is a reduction in the price of goods or services.
   a) Trade
   b) Discount
   c) Profit
   d) Invoice
2. The type of discount given to encourage customers to pay quickly is called a __________.
   a) Trade Discount
   b) Cash Discount
   c) Prompt Payment Discount
   d) Seasonal Discount
3. A __________ discount is applied to the list price of goods before the sale is recorded.
   a) Cash
   b) Trade
   c) Special
   d) Time
4. The main reason for offering a cash discount is to __________.
   a) Reward loyal customers
   b) Encourage early payment
   c) Attract new customers
   d) Increase inventory
5. The percentage of discount is usually calculated from the __________.
   a) Discounted price
   b) List price
   c) Sale price
   d) Profit margin
6. A __________ discount is typically not recorded in the books as a separate entry.
   a) Cash
   b) Trade
   c) Prompt
   d) Seasonal
7. If a trade discount of 10% is given on a list price of N200, the discount amount is __________.
   a) N20
   b) N200
   c) N180
   d) N1800
8. The formula to calculate a cash discount is:
   a) Amount due × (Discount Percentage/100)
   b) List price × (Discount Percentage/100)
   c) Invoice price × (Tax Percentage/100)
   d) Amount due × (Tax Percentage/100)
9. Trade discounts are usually given to __________.
   a) End consumers
   b) Employees
   c) Wholesalers
   d) Retailers
10. Cash discounts are offered to customers who __________.
    a) Buy in bulk
    b) Pay their bills quickly
    c) Return merchandise
    d) Purchase seasonal items
11. The total price after applying a trade discount is __________.
    a) Higher than the list price
    b) Lower than the list price
    c) The same as the list price
    d) The same as the invoice price
12. Businesses give discounts to __________.
    a) Attract customers and increase sales
    b) Reduce taxes
    c) Clear inventory
    d) All of the above
13. A 5% discount on an N500 invoice would be __________.
    a) N25
    b) N50
    c) N75
    d) N100
14. If a business gives a 2% cash discount and the amount due is N10,000, the amount after discount is __________.
    a) N9,800
    b) N10,200
    c) N10,000
    d) N8,000
15. Discounts on purchases are usually recorded in the __________.
    a) Purchase journal
    b) Sales journal
    c) Cashbook
    d) Bank statement

Evaluation Questions (10 Questions):

1. What is a discount, and why do businesses offer it?
2. Explain the difference between trade and cash discounts.
3. How do businesses benefit from offering discounts?
4. How is a trade discount calculated, and where is it recorded?
5. Explain the purpose of a cash discount and how it is calculated.
6. Why might a business offer a trade discount to a wholesaler?
7. How does offering a discount on early payments help a business’s cash flow?
8. What would happen if a business didn’t offer discounts on its products?
9. Provide an example of a business transaction where both a trade and cash discount are applied.
10. How can calculating discounts properly improve a business’s pricing strategy?

Conclusion (5 mins):

The teacher will summarize the lesson on discounts, reinforcing the importance of correctly applying trade and cash discounts. Students will be encouraged to practice calculating discounts on various transactions. The teacher will emphasize how businesses use discounts to attract customers and encourage prompt payments.