Trade discounts - basics

[tpBlacks]

I recently started learning financial accounting and going through discounts now. Study resources say we don't account for trade discounts ; directly deduct them from the invoice.

I'm wondering what happens to our real stock after accounting for a transaction with trade discounts. isn't it get under-estimated ?


an example from a study resource..

Sam bought goods( list price = $1,000 ) from Oliver on cash basis. Oliver allowed a trade discount of 10%.

The double entry for Sam..

Dr Purchases $900
Cr Cash $900


My brain tells me eventhough we bought goods for $900, it really worth $1,000. We have $1,000 worth goods valued at $900 right ? So isn't this really under-estimating our stock ?

 

[kirby]

Good question! Shows your mind is alive and questioning.
Consider what if on the same day Sam buys for $900 another vendor sells the exact same goods for $800. So now Sam's goods are "worth" $800?
This can go on forever. So, the accounting treatment is simply to just record at what you paid for it. What it is "worth" is another issue. As you study acctg, you'll see various approaches to accounting for something's "fair value."
Compare this approach to the Standard Model in physics. Explains a lot but there are some anomalies that don't quite fit. But the tool is useful and it is what we have.

 

[tpBlacks]

Good question! Shows your mind is alive and questioning.
Consider what if on the same day Sam buys for $900 another vendor sells the exact same goods for $800. So now Sam's goods are "worth" $800?
This can go on forever. So, the accounting treatment is simply to just record at what you paid for it. What it is "worth" is another issue. As you study acctg, you'll see various approaches to accounting for something's "fair value."
Compare this approach to the Standard Model in physics. Explains a lot but there are some anomalies that don't quite fit. But it's the tool we have.

.

You're soo kind and helpful. Thanks very much. Wish you good luck !