Theory and Formula for Discount
Discount
Discount is a type of allowance or concession(relaxation) in price. Discount is given so that the buyer is influenced to place an order and
later to make payment in time.
Discount can be also referred to as a deduction in price. The seller deducts the discount from the gross or total price, and the buyer
is supposed to pay the net amount.
The two types of discounts are :-
(1) Cash Discount
(2) Trade Discount
1. Cash Discount
Cash discount is an allowance or concession given by the seller to the buyer. This discount is offered to encourage the buyer for
quick payment or settlement. It is allowed for immediate payment of cash or payment within a short period.
The cash discount is normally shown in the quotation and invoice. It is deductible from the total price and the buyer is requested
to pay only to the net amount. Cash Discount is generally stated in the percentage form.
2. Trade Discount
Trade Discount is a reduction in the catalogue price of the goods allowed only if the ordered quantity by the buyer is quite large.
Main aim of Trade Discount is to encourage the buyer to make bulk purchases(heavy or large transactions). It is allowed on cash as well as credit sales.
The trade discount is not shown in the books of account. The trade discount is calculated as some percentage of the catalogue price.
It change according to the quantity of order.
Assume that a merchant A purchases goods worth, say Rs.2000 from another merchant B at a credit of say 8 months.
Then B create a bill called bill of exchange (also known as Hundi). On receipts of goods, A gives an agreement by signing on the
bill allowing B to withdraw the money from A’s bank exactly after 8 months of the date of the bill.
The date exactly after 8 months is known as nominally due date. Three more days (called grace days) are added to this date
to get a date known as legally due date.
The amount given on the bill is called the Face Value (F) which is Rs.2000 in this case.
Assume that B needs this money before the legally due date. He can approach a banker or broker who pays him the money against
the bill, but somewhat less than the face value. The banker deducts the simple interest on the face value for the unexpired time.
This deduction is known as Bankers Discount (BD). In another words, Bank Discount (BD) is the simple interest on the face value for
the period from the date on which the bill was discounted and the legally due date.
The present value is the amount which, if placed at a particular rate for a specified period will amount to that sum of money at the end
of the specified period. The interest on the present value is called the True Discount (TD). If the banker deducts the true discount on
the face value for the unexpired time, he will not gain anyamount.
Banker’s Gain (BG) is the difference between banker’s discount and the true discount for the unexpired time.
Note: If the date of bill is not given, grace days are not applicable( or not to be added).
Important Formulas:
i) B.D.= S.I. on bill for unexpired time.
ii) B.G.= (B.D.)-(T.D.) = S.I. on T.D.= (T.D.)*P.V.
iii) T.D.= √ P.W. x B.G.
iv) B.D.= [(Amount x Rate x Time)/100]
v) T.D.= ({Amount x Rate x Time)/ 100 + (Rate x Time)]
vi) Amount = ((B.D.x T.D.)/ B.D. - T.D]
vii) T.D.= ((B.G. x 100)/ (Rate x Time)]
Note :BG = Banker's Gain , BD = Banker's Discount , TD = True Discount , S.I = Simple Interest
