A discount is a monetary allowance given to clients in certain conditions. There are two types of discounts in business: trade discounts and cash discounts. While a trade discount is a reduction in the product’s list price, a cash discount is a discount made by a company to its consumers to promote early payment.
The fundamental difference between a trade discount and a cash discount is that for a cash discount, a separate ledger account for discounts granted is opened in the seller’s books, and the discount received is recorded in the buyer’s accounts, whereas for a trade discount, no such account is created.
What is the definition of a discount?
The term “discount” refers to a deduction from the total amount received or payable based on the conditions of the agreement at a defined rate. As a result, if the discount is granted, the receiver receives less than what is owed to him, and the payer pays less than what is owed to him. As a result, the individual receiving payment suffers a loss, while the person paying it benefits.
Trade Discount
The trade discount is a percentage-based reduction offered by manufacturers or wholesalers to their clients on the catalogue price of the items at the time of sale. Manufacturers utilise it as a technique to entice customers, improve sales volume, and encourage bulk orders. As a result, as the volume of purchases increases, the rate of discount increases as well. The fact that trade discount is neither debited or credited in the journal entry is crucial. As a result, the discount is subtracted from the quoted price, and the journal entry for purchases is made using the lower price. Furthermore, the trade discount is deducted from the catalogue price of the products at the time of purchase or sales return, and the net amount is entered. The net amount that the consumer must pay is calculated after the discount has been applied. This net amount (net sales price) is then recorded in the accounting books. In addition, both cash and credit sales are eligible for a trade discount. When cash sales are made, the amount of the discount is deducted from the cash memo, however when credit sales are made, the amount of the discount is deducted from the sales invoice.
Cash Discount
Cash Discount is a rate discount given to consumers in exchange for meeting particular payment conditions, primarily linked to fast cash settlement and avoiding credit risk. Cash discount, as the name implies, is linked to cash flow, i.e. cash receipt or cash payment. It encourages the buyer of the goods to pay as soon as possible in order to receive a cash discount, allowing him to pay a lower amount than what is owed to him. It is given when the buyer pays for the items in a timely or early manner. Cash Discount is recorded on the debit side of the cash book as a discount allowed, while it is recorded on the credit side of the cash book as a discount received.
Difference Between Trade Discount and Cash Discount
BASIS FOR COMPARISON | TRADE DISCOUNT | CASH DISCOUNT |
| Trade Discount refers to the deduction given by the supplier to the customer in the catalogue price of the goods. | Cash discount implies the allowance granted to the customers by the supplier on the invoice price, for immediate payment. |
| Based on the amount of purchase or sales | Based on time, i.e. Period of payment |
| Yes | May or May not be fixed |
| Because of business considerations like trade practices, orders in bulk, etc | As an incentive or motivation, for payment within a specified time. |
| To increase sales in bulk quantity. | To encourage early and prompt payment. |
| Both Cash and Credit Transactions. | Only on cash payments. |
| Not entered in the books of accounts. | Appears as an expense in Income Statement. |
| Deducted from the invoice value or catalogue price of the goods. | Deducted from the invoice value of goods. |
Conclusion
Essentially, trade discounts are discounts given to customers by manufacturers or wholesalers in order to improve sales volume, whereas cash discounts are given to customers by sellers in order to increase cash flow. If a customer pays for items with cash, he or she can take advantage of both trade and cash discounts.
