Trade Discount vs Cash Discount
Discounts are a reduction on the price of the goods or services that are provided by the seller to the buyer. Discounts result in the buyer having to pay an amount less than the listed price for the products, and such discounts are usually offered for to encourage customers to purchase more of the company’s products or to ensure faster payment. The article discusses two types of discounts; trade discounts and cash discounts and explains how these two types of discounts are quite different to one another.
Trade Discount
A trade discount is an incentive provided to a customer to purchase more of a product. There are many types of trade discounts that include discounts for purchasing goods in bulk, discounts provided for new customers, discounts for customers that purchase goods repeatedly, year-end discounts, etc. The aim of offering a trade discount is to encourage the buyer to purchase a larger quantity. Trade discounts maybe offered as a dollar amount reduction from the quoted price or may be provided in the form of a percentage reduction. The trade discount offered will increase in size with the quantity of goods that are purchased; higher discounts are offered for a larger volume of purchases. The trade discount that is offered to one vendor may be different to another since the discount will depend on the type of goods and quantity purchased. Trade discounts cannot be recorded in accounting books. Instead, they are recorded as revenue (the amount that was provided as a discount will be reduced from total revenue).
Cash Discount
Cash discounts are provided to customers either when a customer pays an invoice with a specific period of time, or when the customer makes a cash payment to the seller instead of using checks or credit cards. Cash discounts are stated in contractual agreements and are used to reward customers to make early payments on their invoice. This discount maybe printed on the invoice itself, and once the seller issues the invoice with a standard payment period of 30 days customers can refer to the discount details on their invoice and see how much of the total amount can be saved as a discount when early payments are made. Cash discounts are also used frequently for customers that pay cash instead of using credit cards. For example, gas stations offer discounts on the price for customers who pay in cash since gas stations can save on credit card processing fees when customers pay in cash.
What is the difference between Trade Discount and Cash Discount?
Trade discounts and cash discounts are similar to each other in that they are both offered by the seller to the purchaser, and they both reduce the final amount that needs to be paid. The aim of a trade discount is to encourage customers to purchase a higher volume of the company’s product. The aim of a cash discount is to encourage the buyer to settle the invoice within a specific period of time, also for cash payments, instead of using checks or credit cards. While a trade discount is provided on the purchase of goods, a cash discount is provided at the time the payment on the invoice is made.
Summary:
Trade Discount vs Cash Discount
• A trade discount is an incentive provided to a customer to purchase more of a product.
• Cash discounts are provided to customers either when a customer pays an invoice within a specific period of time, or when the customer makes a cash payment to the seller instead of using checks or credit cards.
• A trade discount is provided on the purchase of goods, and a cash discount is provided at the time the payment on the invoice is made.