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Suppose James purchased goods from Ali of the list price of Rs. 5000, on April 1, 2016. Ali allowed 10% discount to James on the list price, for purchasing goods in bulk quantity. Further, a discount of Rs. 200 was allowed to him, for making immediate payment.
Answer: First of all, the discount allowed on the list price of the goods, i.e. 10% of Rs. 5000 = Rs. 500, is a trade discount, which is not going to be recorded in the books of accounts. Next, the discount received by James of Rs. 200 for making quick payment is a cash discount, as it is allowed on the invoice price of the goods. Cash discount is entered in the books of accounts. Therefore the journal entry in the books of James is
Dr/purchases A/C 4500
Cr/Cash A/C 4300
Cr/Discount Received 200
