X sold goods for ₹ 20,000 in cash after allowing 10% trade discount and 5% cash discount. Give the amount which will be debited to cash and discount account in books of seller:

Question

Accepted Answer

The correct option is 2: ₹ 17,100, ₹ 900.

This problem requires the application of accounting principles for both trade discount and cash discount. First, the **Trade Discount** (10% on ₹ 20,000, which is ₹ 2,000) is always deducted from the List Price to determine the Net Sales Price (₹ 20,000 - ₹ 2,000 = ₹ 18,000). This is the amount at which the sale is recorded, and the trade discount itself is *not* recorded in the ledger accounts. Second, the **Cash Discount** (5%) is calculated on the Net Sales Price of ₹ 18,000, which equals ₹ 900. Since the seller is allowing this discount, it is an expense for him and is *debited* to the Discount Allowed Account with ₹ 900. Finally, the cash received is the net sales price minus the cash discount (₹ 18,000 - ₹ 900 = ₹ 17,100), which is *debited* to the Cash Account. Therefore, the amounts debited to Cash and Discount Allowed accounts are ₹ 17,100 and ₹ 900, respectively.

The incorrect option is 1: ₹ 17,100, ₹ 2,900. This option correctly calculates the cash received as ₹ 17,100 but makes a fundamental mistake in accounting for the total discount. It incorrectly adds the trade discount of ₹ 2,000 and the cash discount of ₹ 900 to arrive at a total of ₹ 2,900, which is then debited to the Discount Account. The trade discount is a non-monetary reduction and is never entered as a debit in the books of accounts. Only the cash discount (₹ 900) should be debited as 'Discount Allowed'.

The incorrect option is 3: ₹ 17,100, ₹ 1,000. While the amount of cash debited (₹ 17,100) is correct, the amount debited to the Discount Account (₹ 1,000) is flawed. This figure results from mistakenly applying the 5% cash discount rate to the original List Price of ₹ 20,000 (₹ 20,000 x 5% = ₹ 1,000). Accounting standards dictate that cash discount must be calculated on the amount *after* the trade discount has been deducted. Thus, the base for the cash discount calculation must be the net sales price of ₹ 18,000.

The incorrect option is 4: ₹ 19,000, ₹ 1,000. Both amounts provided in this option are incorrect. The cash discount of ₹ 1,000 is incorrect because it is calculated on the list price instead of the net price. The cash debited of ₹ 19,000 is also incorrect, as it only reflects the deduction of the trade discount (₹ 20,000 - ₹ 1,000, which incorrectly assumes a 5% trade discount) or the list price minus the incorrect cash discount, but not both correctly. The correct cash received should be ₹ 17,100, which accounts for both the trade discount and the cash discount.