By Madhuri Thakur. Trade discount is referred to a discount that is granted by the seller of the goods to the buyer on the list price or catalog prices of the goods supplied mostly in case of bulk sales. A cash discount is offered mostly to facilitate a prompt payment from the buyer.
To increase sales revenue and attract more buyers, every company offers trade and cash discounts. Trade discounts are more prominent in business-to-business transactions, where the buyers are usually wholesalers and therefore, prefer to buy in bulk quantities. On the other hand, cash discounts are offered to any buyer who makes the payments on time. Trade discount is offered on the list price or the catalogue price that the buyer sees at the time of purchase.
The list price gets reduced by a certain percentage depending on the quantity purchased. A cash discount is offered to the buyer on the invoice or billed price of the goods and services.
It is the price at which the product is finally billed, and the buyer needs to pay it. Since the trade discount is decided based on the quantity being purchased by the buyer, we can say it is offered only at the time of purchase.
This sale done can, however, be cash or credit sales for the company. Whereas, in case of cash discount a bill is already generated, but if the payment is made much ahead of the payment date, some percentage of discount is offered on this billed or invoice rate. Hence, the cash discount can be said offered only on cash sales. Trade discount is the discount that sellers offer on the list price of the offering, irrespective of the mode of payment. On the other hand, a cash discount is a special discount that sellers provide only on cash payments for their products.
Thus, though both are discounts and reduce the ultimate cost to the purchaser, however, there are lots of differences between trade discounts and cash discounts. Trade discounts help a supplier to sell a higher quantity of the product. Sellers may increase the percentage of trade discounts with higher purchase quantities and vice-versa. Thus, it acts as an incentive for a buyer to buy more quantity of the product.
Such discounts are usually applied at the time of the purchase of the product. Hence, sellers deduct the trade discount from the price of the product first and then bill it. However, sometimes it may be applicable on reaching a certain sales volume. A cash discount is generally available over and above the trade discount. It is a special type of discount that works as an incentive for buyers to make cash payments for the product early, rather than waiting for the credit period or due date.
Sellers may also mention relaxation of a few days before which the buyer should pay in order to avail this type of discount. We mention it as an additional deduction in a bill or invoice.
Both types of discounts differ in many ways. Let us have a look at the key differences between the two. The manufacturers and sellers offer trade discounts to encourage the buyers to buy more quantities of the product. Sellers offer cash discounts as an incentive to the buyers to make payment for the goods as early as possible. The sole objective of giving it is to motivate the buyers to pay for their purchase instantly or within the stipulated time frame. The basis for the calculation of trade discounts is the catalog price.
Sellers provide discounts on the catalog price of the products that they offer. The price mentioned in an invoice is generally inclusive of the trade discount or we can say it is a net of trade discount.
As a standard practice usually the trade discount does not appear in the bill as a separate item. On the other hand, the basis for the calculation of cash discounts is the final invoice price.
Sellers provide cash discounts on the amount they print on the sales invoice. It is shown separately in an invoice. Sellers deduct cash discount from the invoice value to arrive at the amount which a customer has to finally pay for the product or service. The key consideration when a seller offers a trade discount is the quantity that the buyer intends to purchase. Written by : Georgina Nderitu. Maheshwari, and Sharad. Financial Accounting.
New Delhi: Vikas Publishing House. Comprehensive Accountancy XI. Laxmi Publications, Basic Accounting. User assumes all risk of use, damage, or injury. You agree that we have no liability for any damages.
Trade Discount This is a discount which is allowed by the seller to the buyer on the list price of the purchased goods. Cash Discount Credit is a very important aspect of a business. Common Features Although trade discount and cash discounts are different concepts in accounting, they share some common features due to the fact that they have one main final goal in the interest of a business.
Nature Although all the other features such as the basis of issuance of a discount and the recording or lack of in the books of accounts may be different, both are discounts, just as the names suggest.
Parties Involved Both trade discount and cash discount involve the same number of parties. Objective In light of the objective of the discount, one can argue that each of the discounts has a particular and distinct purpose they wish to achieve but after all, both discounts have the same objective in the long run which is for the benefit of the business.
Differences The differences between trade discount and cash discounts can be categorized under the following: 1. Source The first and obvious difference arises from the origin of the discounts. Foundation These two discounts also differ on the basis on which they are allowed. Record in Books of Accounts There is also a difference in the way the records of these two accounts are kept and where they are kept.
Deduction This is a difference regarding the place from where the discount is deducted. Presentation In tracking the discounts, one needs to know which discount is reflected where.
Discount Policy This is normally a decision by the business and it dictates how and how much discount is given. It is given during time of payment. It is inversely proportional to the amount of time taken before making a payment. Record in Books of Accounts It is not recorded in the cash book. It is recorded in the cash book as discount allowed on the debit side.
Deductions The deduction of this discount is made on the invoice value of the goods purchased. Does not appear in the profit and loss accounts. Discount Policy Generally allowed as a temporary business or product promotion measure as per the announced business strategy. May be allowed in cash when payments are made promptly as per the policy the business has declared although there is no set provision for cash discount.
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