Account 3 Marks Question

In accounting, an account is a record in the general ledger that is used to sort and store transactions. For example, companies will have a Cash account in which to record every transaction that increases or decreases the company's cash. Another account, Sales, will collect all of the amounts from the sale of merchandise. Most accounting systems require that every transaction will affect two or more accounts. For example, a cash sale will increase the Cash account and will increase the Sales account.

Trade Discount is a discount allowed by the seller on purchase of goods in large quantity. It is normally allowed by the seller to the purchaser who further sells goods to the consumer. It is deducted in the invoice from sale price and is not recorded in the books of account. Sale is recorded at the net value, i.e., sale price less trade discount. For example, Amit sells goods to Vikas of ₹ 10,000 allowing him trade discount of 20%. The invoice will be prepared for net amount ₹ 8,000, i.e., after trade discount. Amit will pass following Journal entry in his books of account:
Vikas will pass following journal entry in his books of account:

Debit refers to the left side of an account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. An item recorded on the debit side of an account is said to be debited to the account. An item recorded on the credit side of an account is said to be credited to the account.
Both debit and credit may represent either increase or decrease depending upon the nature of an account. The rules of debit and credit depend on the nature of account.

1. Seller of goods realises the sales amount promptly. Cash discount is allowed to encourage a debtor to pay within a specified period.
2. The possibility of bad debts is reduced for the seller.
3. It improves the cash inflow of the business which can be better utilised.
4. Early payment results in higher cash discount, thus, increases income.
5. Better cash discount earning enables selling of goods at lower prices.

Solution is as follows.

It is deducted in the invoice from sale price and is not recorded in the books of account. Sale is recorded at the net value, i.e., sale price less trade discount. For example, Amit sells goods to Vikas of ₹ 10,000 allowing him trade discount of 20%. The invoice will be prepared for net amount ₹ 8,000, i.e., after trade discount. Amit will pass following Journal entry in his books of account:
Vikas will pass following journal entry in his books of account:

We credit a liablity ledger when the "Liability Increases". We should 'debit' the liability ledger when we want to reduce the balance in the liability account. For eg: Let us assume that, there is a Rent payable for ₹ 500. Outstanding Rent is a Liability.Then, the entry will be,

Rent A/c Dr.	₹ 500
To Outstanding Rent A/c	₹ 500

Here, when we credit O/S Rent A/c, Liability Increased. Now, the O/S Rent is paid through Cash. So, the entry will be,

Outstanding Rent A/c Dr.	₹ 500
To Cash A/c	₹ 500

Here, when O/S Rent is paid Liability has Decreased. So, it is debited.

1. It improves sales by encouraging the purchaser to buy large quantities.
2. It reduces the purchase cost of the purchaser and thus, increases profit margin.
3. A change in the rate of trade discount may be used as a tool to face competition.
4. Different prices can be charged to regular customers and occasional customers.
5. It enables the retailer to sell at the list price and at better profit.
6. It is an easy method of making changes in prices without reprinting catalogues or changing the price given in the articles.

Solution is as follows:

Personal Accounts: Accounts which relate to persons, i.e., individuals, firms, companies, debtors or creditors, etc., are Personal Accounts. Examples of Personal Accounts are the account of Ram & Co., a customer (Debtor), or the account of Jhaveri & Co., a supplier of goods (Creditor), Capital Account and Drawings Account of the proprietor. The main purpose of preparing a Personal Account is to determine the balance due to or due from persons or organisations.
Capital account is a personal account. because capital account is related to owner personal capital and thats why this is treated in the liabilities side of balance sheet.

Cash Discount is a discount allowed by the seller of goods to encourage prompt or early payment. The usual method to encourage payment within the specific time, the seller allows cash discount say @ 2% of invoice value to the buyer. Cash discount is calculated after deducting trade discount from the invoice price. In other words, cash discount is calculated always on net amount.

Cash Discount Allowed is an expense and is debited to Discount Allowed Account. It is closed by transferring it to the Profit and Loss Account. Similarly, Cash Discount Received is an income and is credited to Discount Received Account which is transferred to Profit and Loss Account.

It is credited because at the time of purchase GST Paid on these goods was debited to Input GST (CGST and SGST or IGST) Account. The goods are not sold but have reached their final destination, i.e., will not be sold further. Therefore, GST (CGST and SGST or IGST) is credited.