Trade discounts are very seldom recorded on the books, the actual selling price and not the list price being entered. Cash discounts are invariably recorded. If the merchant knew at the time of the sale which optional basis of settlement the buyer would choose, he could record the transaction at a net figure on that basis without entering the discount portion. This would, of course, result in a varying figure at which sales were booked. Accordingly, the almost invariable practice is to record sales at the gross amount and show by means of the Sales Discount account the acceptance of any lesser sum in settlement in accordance with the sales contract. Bank discount has to be booked in order to show the cost of the loan which is the difference between the asset received, cash, and the asset parted with, notes. The matter of bank discount has been treated in some detail in [Chapter XLII].
The Method and Purpose of Trade Discount.—Trade discounts are so universally met with in business that an extended discussion of them will be of value to the student. As has been stated, a trade discount is a deduction from the list price and it serves two purposes. It is apparent that the prices listed in the catalogue cannot be changed until a new catalogue is printed and that it would not be practicable to print a new catalogue to make a change in selling prices. Therefore, instead of reprinting the catalogue whenever market prices fluctuate and a change in the list prices must be made, sheets containing the discounts allowed from list prices are published, the expense of which is much less than that of a new catalogue.
The other purpose served by the trade discount is in partly concealing the real quotation. Without the rate of discount allowed from that list, the catalogue tells nothing of the real price. In this way a concern in publishing its catalogue does not lay itself open to the risk of being underbid by competitors publishing later catalogues.
Prices may be quoted at a single discount or by means of a series of discounts, each taking as its base the net amount left after deducting the next preceding discount. Examples will illustrate:
1. Goods listed at $250 are quoted at 20% off.
The sale price here is $200.
2. Goods listed at $500 are quoted at 50% and 20% off.
50% off $500 leaves $250.
20% ” $250 ” $200—the same real sale price as in No. 1.
3. Goods listed at $750 are priced at 50%, 33⅓%, and 20% off.
50% off $750 leaves $375.
33⅓% ” $375 ” $250.
20% ” $250 ” $200—the same as in Nos. 1 and 2.
It is apparent that the list prices without the trade discounts tell nothing as to the real prices.
Methods of Calculation.—Short methods for calculating trade discounts when given in a series are often employed. For a series of only two discounts, a single rate equivalent to the two may be found by subtracting their product from their sum—always treating them as decimals. Thus a series of 20 and 20 is equivalent to a single rate of 36,
(.20 + .20 = .40; .20 × .20 = .04; .40 - .04 = .36).