USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Payment of the bill is generally made after the expiry of the specified period. The drawee may make the payment of the bill even before the date of maturity of the bill In case of receiving payment of the bill even before the due date of the bill, the drawer allows certain discount, here known as “rebate” as a customary trade practice. The logic for allowing this cash discount is simple enough, “The drawer will receive the amount earlier, make its use in the business and earn even more profit than what he has been allowing as discount.”

 

Secondly, the drawer has received the payment. A fear that the payment may not be received is over. In certain cases. the drawer makes it clear to the drawee, that he will allow discount at certain specified rate, if the payment is made before the due date.

 

Calculation of the Amount of Rebate

 

(i) In certain cases, the amount of the rebate is specified.

(ii) In certain cases, rebate is allowed at specified rate. In such cases the amount of the rebate will be calculated for the period between the date of payment and the due date. “The earlier the payment the more amount of rebate” is the policy of the business.

 

Illustration 7. Ansar accepts a bill drawn by Azhar for $ 8,000 on March 15, 2003 payable after 4 months. According to the trade practice in the industry cash rebate @ 6% p.a. is allowed. Calculate the amount of rebate in the following cases :

 

(i) Ansar makes payment on Apri/18, 2003.

(ii) Ansar makes the payment on May 18, 2003.

(iii) The payment of the bill is made on June 18, 2003.

Solution.  (i) Discount= 8 ,000 * 6 / 100 * 3 / 12 = 120

 

Rebate has been calculated for the period between the date of payment and the due date, i.e., April 18- July 18 or 3 months.

 

(ii) Rebate = 8,000 * 6 / 100 * 2 / 12 = 80

 

Rebate has been allowed for 2 months, i.e., May 18-July 18.

 

(iii) Rebate = 8,000 * 6 / 100 * 1 / 12 = 40

 

Rebate has been calculated for one month, i.e., June 18-July 18.

 

Accounting Treatment

 

Rebate will affect both the drawer and drawee, so both of them will pass entry for the rebate. The amount of rebate will be an expense for the drawer, because he has been receiving lesser amount. This is why, rebate account together with cash account will be debited in the books of drawer. It will be gain to the drawee, so the drawee will credit rebate account together with cash account.

 

Illustration 8. Q purchases goods from P for $ 12,000 onAprill5, 2003 subject to a trade discount of 10% and accepts a bill for the amount. The bill is payable after 3 months. Q met the bill on May 18 and was allowed discount @ 6%.

 

Pass journal entries in the books of P and Q.

Solution.                                                         Journal Entries

In the Books of P

Date                           Particulars

 

 

2003

Apr. 15              Q

To Sales A/c

(Being sales of goods on credit)

 

Apr. 15             B/R A/c

                        To Q

(Being the acceptance of the bill received)

 

May 18                   Cash A/c

Rebate A/c

To Bills Receivable A/c

( Being the payment of the bill required under a rebate)

                                 Amount

 L.F.                Debit          Credit

                        $                  $

Dr.                10,800

10,800

 

 

 

Dr.                10,800

10,800

 

 

Dr.               10,692

Dr.                108

10,800

In the Books of Q

2003

Apr. 15                        Purchases A/c                                      Dr.                  10800

To P                                                                                                    10800

(Being goods purchased from P)

 

Apr. 15                        p                                                         Dr.                   10,800

To Bills Payable A/c                                                                                        10.800

(Being the acceptance of the bill given)

 

May 18                        B/P A/c                                               Dr.                  10,800

To Cash A/c                                                                                         10,692

To Rebate A/c                                                                                     108

(Being the payment of the bill under a rebate of $108)

 

Notes. (i) Trade discount is not recorded in the journal. This is why, entry regarding sales and bill has been made with the amount of sales less trade discount.

 

(ii) Rebate has been calculated for two months, the period between the date of payment and due date, i.e., May 18- July 18.

 

(iii) Rebate is nominal account. It is an expense for P so debited in his book. It is gain for Q, so credited in his book.