Cash discount and trade discount

Cash discount and trade discount

a) Cash discount

Cash discount is allowed to the parties making prompt payment within the stipulated period of time or early payment. It is discount allowed (loss) for the creditor and discount received (gain) for the debtor who makes payment. The discount is allowed when payment is received or made and hence, the entry for discount is also passed with the entry of payment. The earlier the payment, the more may be the discount. Cash discount motivates the debtor to make the payment at an earlier date to avail discount facility. For example, the terms may be.

“5% discount will be allowed if the payment is made within one month.

3% discount will be allowed if the payment is made within two months”.

Discount allowed account will be shown on the debit side of profit and loss account and discount received account will be shown on the credit side of profit and loss account. When cash discount is allowed in respect of sale of goods or services, the seller allows cash discount to the buyer when payment is made.

b) Trade discount

Trade discount is a deduction given by the supplier to the buyer on the list price or catalogue price of the goods. It is given as a trade practice or when goods are purchased in large quantities. It is shown as a deduction in the invoice. Trade discount is not recorded in the books of accounts. Only the net amount is recorded. Example: Suppose the sale of goods for 10,000 was made and 10% was allowed as trade discount, the entry regarding sales will be made for Rs. 9,000 (10,000 – 10 per cent of 10,000). In the same way, purchaser of goods will also record purchases as Rs. 9,000).

Differences between cash discount and trade discount

Following are the difference between cash discount and trade discount: