(a) Explain the following terms; i. Trade discount ii. Cash discount iii. Bad debts iv. provision for doubtful debts v. Bad debts recovered (b) Mention the ...

(a) Explanation of terms

1. Trade discount: a reduction granted off the list (catalogue) price of goods, usually for buying in bulk or for being a fellow trader. It is deducted before the invoice total is arrived at, so only the net amount is recorded; trade discount never appears as a separate entry in the books.
2. Cash discount: an allowance given to a debtor for settling an account promptly, within a stated credit period. It is recorded in the books - as discount allowed (an expense) by the seller and discount received (an income) by the buyer.
3. Bad debts: debts owed by customers that have become irrecoverable and are written off as a loss (an expense) in the profit and loss account.
4. Provision for doubtful debts: an estimated amount set aside out of profit, on the prudence principle, to cover debts that may prove irrecoverable in the future. It is a charge against profit and reduces debtors in the balance sheet.
5. Bad debts recovered: amounts previously written off as bad but later paid by the debtor; they are treated as an income/gain in the profit and loss account.

(b) Errors that do not affect the agreement of the trial balance

• Error of omission - a transaction completely left out of the books.
• Error of commission - correct amount posted to the wrong account of the same class (e.g. wrong debtor).
• Error of principle - posting to a wrong class of account (e.g. an asset treated as an expense).
• Error of original entry / error of amount - a wrong figure entered from the source document into both accounts.
• Complete reversal of entries - the account to be debited is credited and vice versa.
• Compensating errors - two or more errors that cancel each other out.
• Error of duplication - a transaction recorded twice.