UNIT IV: Lesson 3 Trade and Cash Discounts - Part 1
LESSON 3 (PART A) – TRADE DISCOUNTS
OBJECTIVES:
At the end of the lesson, you are expected to:
1. Compute for the net invoice price (NIP) using a single trade discount;
2. Compute for the NIP using a discount series;
3. Compute for a single equivalent discount rate for discount series; and
4. Compute for the NIP rate and obtain the NIP using said rate.
TRADE DISCOUNTS
Single Discount
Computing for discounts makes use of our basic percentage formula P = BR where the base is the list price, the rate is the discount rate, and the percentage is the discount.
As such,
Discount = List Price x Discount Rate
Example:
Compute the discount for an item with a list price of P1, 500.00 subject to a 10% discount. What is its net invoice price?
Given: List Price = P1, 500.00; Discount Rate = 10%
Find: Discount and Net Invoice Price
Solutions:
Discount = List Price x Discount Rate
Discount = P1, 500.00 x 10%
Discount = P150.00
Net Invoice Price = List Price - Discount
Net Invoice Price = P1, 500.00 - 150.00
Net Invoice Price = P1, 350.00
Alternatively, another way of computing for the net invoice price is to multiply the list price by the net invoice price rate. The net invoice price rate is equal to 100% less the
discount rate. Thus,
NIP Rate = 100% - Discount Rate
NIP Rate = 100% - 10%
NIP Rate = 90%
To get the discount, we deduct the net invoice price from the list price:
Net Invoice Price = List Price x NIP Rate
Net Invoice Price = P1, 500.00 x 90%
Net Invoice Price = P1, 350.00;
Discount = List Price - NIP
Discount = P1, 500.00 - P1, 350.00
Discount = P150.00
Series of Discounts
In certain instances, a seller grants additional discounts other than the discount ordinarily given by him. For instance, aside from the regular 10% discount, a seller may grant
a special discount of 5%. The series of discounts is, therefore 10% and 5%. This is not, however, equivalent to 15% as well as it is illustrated below.
Example: Compute for the discount and the net invoice price if an item listed at P1, 500.00 is given a 10% and 5% discount.
Given: List Price = P1, 500.00; Discount Rates = 10% and 5%
Find: Discount and Net Invoice Price
Solutions:
Method 1
We first multiply the list price by the first discount rate. To get the second discount, find the difference of the list price and the first discount, and then multiply to second
discount rate. We then deduct the second discount from the said difference to get the net invoice price.
List Price P1, 500.00
Less 10% (P1, 500.00 x 10%) 150.00
Difference P1, 350.00
Less 5% (P1, 350.00 x 5%) 67.50
Net Invoice Price P1, 282.50
Our total discount is equal to the first discount plus the second discount.
Total Discount = P150.00 + 67.50
Total Discount = P217.50
Method 2
1. Deduct the first rate from 100% and multiply the list price by the rate obtained.
100% - 10% = 90%
Multiply the list price by the first balance rate obtained in step 1
List Price P1, 500.00
First Balance Rate 90%
First Balance P1, 350.00
2. Deduct the second discount rate from 100% and multiply the first balance obtained in first procedure by the second balance rate achieved.
100% - 5% = 95%
First Balance P1, 350.00
Second Balance Rate 95%
Net Invoice Price P1, 282.50
This method involves a process similar to the use of the net invoice price rate (NIP Rate) applied to the list price to get the net invoice price. Our discount is still equal to the
list price less the net invoice price.
Discount = List Price - Net Invoice Price
Discount = P1, 500.00 - P1, 282.50
Discount = P217.50
Method 3
Using this method, we will convert the series of discounts to a single equivalent discount rate.
Step 1: Deduct the series of discounts individually from 100%.
1. 100% - 10% = 90%
2. 100% - 5% = 95%
Step 2: Multiply the resulting products by themselves to give us the net invoice price rate.
a x b = NIP Rate
90% x 95% = 85.5%
Step 3: Deduct this NIP Rate from 100% to get the single equivalent discount rate.
100% - NIP Rate = SEDR
100% - 85.5% = 14.5%
Take note that if we add the NIP rate and the single equivalent discount rate, we will get 100%. To get the discount, we multiply the single equivalent discount rate to the list
price.
Discount = List Price x SEDR
Discount = P1, 500.00 x 14.5%
Discount = P217.50
To get the net invoice price, we multiply the list price by the net invoice price rate (NIP rate) obtained in Step 3.
Net Invoice Price = List Price x NIP Rate
Net Invoice Price = P1, 500.00 x 85.5%
Net Invoice Price = P1, 282.50
For series of trade discounts, you have an option to use any of the methods presented.
To help you understand more the concept of trade discount, here is a video for you.
Trade Discount and Discount Series
