Discounts in the UK

A brief description of terms

Types of discount

• Trade discount

• Settlement discount

• Other discounts

Trade discountThis 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.

Settlement DiscountSettlement 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

Settlement discount and VATWhen 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

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.

Other discountsA 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.