Discounts – An Integral Part of Business Transaction
Discounts are a necessary part of the business trade. Since time immemorial, the discount has been a part of the trade. Buyers offer discounts, while sellers receive either implicitly or explicitly. Two important discounts are as follows:
Trade Discounts
Cash Discounts
We will learn about these two discounts vividly in this section. While our prior most discussion will be based on the difference between these two discounts. We will present examples, differences between trade discount and cash discount under the sub-heading ‘trade discount vs cash discount’, answer questions related to ‘what is trade discount and cash discount?’
Trade Discount and Cash Discount
In this section, we will discuss in brief trade discounts and cash discounts. Further, we will chalk out the difference between cash and trade discounts.
Trade and cash discounts as already mentioned became an important aspect of the business. In today’s market, consumers like offers and discounts hence, trade and cash discounts are merely not discounting which will degrade the profit aspects of business, rather these discounts are great profit boosters. Let us know what actually do these discounts mean:
Trade Discount – This discount is being provided by the seller at the time of purchase. This is done to attract customers and thereby increase sales. Even more importantly, the sellers are interested in those potential customers who are interested in buying a bulk number of quantities. As this amount is offered at the time of purchase, this is added implicitly as part of the prices of the products which is included in the transaction before the process of billing.
Cash Discount – This discount is offered at the time of making payment. When the buyer pays the seller, this discount is calculated as an additional deduction on the invoice which is already printed. This is offered subject to certain conditions which influence the buyer to make a large part of the payment upfront and pay the remaining amount in instalments as soon as possible.
Meaning of Trade Discount
(Image Will be Updated)
A trade discount is a discount that is being offered by the seller to the buyer. This amounts to the reduction of the price of a particular item.
Trade discounts are offered in order to increase the sales of the product and also to make the customers feel that they are getting a good offer. There are no such accounts maintained for keeping the track of the discounts which are offered.
Meaning of Cash Discount
(Image Will be Updated)
A cash discount is being referred to as the discount which is offered by the seller of a product to the buyer at the time of payment for the purchase of an item. This reduction is being provided at the value of the invoice which is made.
A cash discount is offered to make the customer or the buyer pay for the product immediately, this discount helps the business in reducing the chances of avoiding the credit risk completely or partially.
Cash discounts are mostly used in business transactions, where the creditor will be reducing the amount in order to be paid by the debtor if the payment is being processed within the time limit.
Proper records are also maintained for all such discount transactions both by the buyer and by the seller.
Example of Trade and Cash Discount
Consider a truck maker XYZ and an PQR firm who buys the truck from them with a price of each truck being 6,00,000. Assuming PQR buys 50 tractors in total as a part of an annual contract and XYZ offers a trade discount of 10% to PQR. Then
List price = 6,00,000 * 50 =$3,00,00,000
Trade discount = 10% = 10% * 3,00,00,000 = $30,00,000
The amount payable = List price – discount
= 3,00,00,000 – 30,00,000
= $2,70,00,000
PQR was liable to pay this payment in 90 days. Suppose, XYZ, in order to get paid early offers an additional discount of 3% to ABC if it makes this payment within 30 days. For such a case, the calculations will be:
Amount payable as per invoice = $2,70,00,000
Cash discount = 3% = 3% * 2,70,00,000 = $8,10,000
Amount payable (within 30 days) = 2,70,00,000 – 8,10,000
= $2,61,90,000
Note the calculation of trade discount will be done before printing the invoice while the seller offers the cash discount on the final or last payment.
What is the difference between Trade Discount and Cash Discount?
The main difference between trade discount and cash discount is - trade discount refers to the reduction or the decrease in list price known as the discount which is allowed by a supplier to the consumer at the time of selling the product generally in a bulk number to the particularly concerned consumer, whereas, in cash discount, the discount is given by the supplier on their cash payments in order to recover the cash debts on time which will motivate the buyer to pay cash as early as possible, the buyers here are given a discount if they pay within the stipulated or particular time period.
Discount results in the reduction of the selling price of the product, this strategy makes the product more attractive to the customer.
Reduction in this price makes a psychological impact on the customer which actually results in the purchase of the item.
Trade Discount Vs Cash Discount
(Image Will be Updated)
Point of Difference | Trade Discount | Cash Discount |
Definition | This is a type of discount which is offered by the seller to the buyer which causes a reduction in the price of the product. | Cash Discount refers to the discount which is offered by the seller to the buyer on the invoice price while making the payment within a particular time period. |
Need of offering the discount | To promote the bulk sale of the product. | To increase the chance of prompt payment and reduce the chance of bad debts. |
In the accounting system | Not shown in the books. | Properly recorded in the books, in the profit and loss statement. |
When it is allowed? | During the time of purchase | During the time of payment |
Allowed on which type of transaction? | Both cash and credit transactions | Only in cash transactions |
FAQs on Difference Between Trade Discount and Cash Discount
Question 1: How important are cash discounts for a trader?
Answer: A trade discount will represent the reduction in the cost of goods and services which is sold in the business environment. Trade discounts will help small businesses to save money while purchasing goods or services from suppliers. Many of the suppliers with their small businesses pay within a specific time frame in order to receive the trade discount.
Question 2: What is the accounting treatment of the trade discount?
Answer: The sale and purchase are recorded at the amount after which the trade discount is being subtracted. As trade discount is deducted before any transaction or exchange takes place, this discount does not form part of the accounting transaction and thus it is not entered into the accounting records of the business in the discussion.
Question 3: How much is a cash discount worth?
Answer: A cash discount of generally around 1 or 2% of the invoice total, although some of the businesses may offer up to a 5% discount in certain cases.
