Question

a) Distinguish between cash discount and a purchase discount.

b) What is the difference between a sales discount and a purchase discount? Can you illustrate a journal entry for each?

c) What is the purpose of a accounts payable subsidiary ledgers? How is it used? Why is it used?

Answer 1

a) Distinguish between cash discount and a purchase discount

BASIS FOR COMPARISON	PURCHASE DISCOUNT	CASH DISCOUNT
Meaning	A discount given by the seller to the buyer as a deduction in the list price of the commodity is trade discount.	A deduction in the amount of invoice allowed by the seller to the buyer in return for immediate payment is cash discount.
Purpose	To facilitate a bulk sales.	To facilitate a prompt payment.
Invopice	It is shown in invoice as a deduction itself.	It is not shown in invoice.
When allowed?	At the time of purchase.	At the time of payment.
Allowed to all customers	Yes	No
Entry in books	No	Yes
Vary with	Time period, when payment is made.	Quantity of goods purchased or amount of purchases made.

b) What is the difference between a sales discount and a purchase discount?

Sales Discount

*A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer

*A sales discount may be offered when the seller is short of cash, or if it wants to reduce the recorded amount of its receivables outstanding for other reasons

Journel entries for sales discount

When company making cash sales the journel entry will be:

	Debit	Credit
Cash A/c	xxx
Sales discounts A/c		xxx
Sales A/c		xxx

When company making cash sales the journel entry will be

	Debit	Credit
Cash A/c	xxx
Sales discounts A/c		xxx
Accounts receivables		xxx

Purchase Discounts:

*A purchase discount is a deduction that a payer can take from an invoice amount if payment is made by a certain date

*This discount is used when a seller needs to accelerate the inflow of cash

  However, the effective interest rate associated with purchase discounts is usually high, so this can be an expensive form of funding

In case of credit purchase

	Debit	Credit
Creditors A/c	xxx
Cash A/c		xxx
Discount received A/c		xxx

In case of cash purchase

	Debit	Credit
Purchase A/c	xxx
Cash A/c		xxx
Discount received A/c		xxx

c)

What is the purpose of a accounts payable subsidiary ledgers

*An accounts payable subsidiary ledger is an account book that tracks all expenses of a business and the number of suppliers that the business owes

*. This ledger shows the transaction history of a particular business and the amount of owes its suppliers, as well as current and outstanding accounts payable

How its used

- An accounts payable subsidiary ledger is also called creditors’ ledger or AP subledger (subaccount).

This ledger has a separate account for each vendor or supplier containing the amount the company owes each of them.

The amount payable in this subsidiary ledger is compared to the one in the general ledger to ensure accuracy.

Why its used

-Accounts payable subsidiary ledger or AP subledger is important to all businesses that take inventory of materials or products which are delivered by suppliers.

  Through the AP subledger, a business has an idea of which of its vendors it is owing and how much.

AP subledger show specific amounts that a company owes specific suppliers, the total amount of then reconciled with the accounts payable balance in the general ledger.

Unlike accounts payable in the general ledger that only reveals the total money payable by a business, account payable subsidiary ledger reveal details.

For example;

General ledger: $40,000

Account payable subsidiary ledger: Vendor A $8,000, Vendor B $5,000, and so on.