What is trade discount?

Trade discount is a discount which is referred to as, discount given by the seller to the buyer
at the time of purchase of goods. It is given as a deduction in the list price or retail price of
the quantity sold. This is usually allowed by the sellers to attract more customers and receive
the order in bulk i.e. to increase the number of sales. No record is to be maintained in the
books of accounts of both the buyer and seller for this discount.
 This is a discount allowed on a product as a reduction to the retail price. It is the
amount by which a manufacturer or wholesaler reduces the price of a product when it
sells the product to a reseller.
 It usually varies with the quantity of the product purchased. It is a reduction in the
published price of the product.
 For example, a high-volume wholesaler might be entitled to a higher trade discount
compared to a medium or low-volume wholesaler.
 Usually, a retail customer will not receive any discount and will have to pay the entire
published price.

Differences Between Trade Discount vs Cash Discount

Basis For Comparison Trade Discount  Cash Discount 

A discount given by the seller to A reduction in the amount of invoice

the buyer as a deduction in the list allowed by the seller to the buyer in
Meaning
price of the commodity is traded return for immediate payment is cash
discount. discount.

Purpose To facilitate sales in bulk quantity. To facilitate a prompt payment.

When allowed? At the time of purchase. At the time of payment.
Entry In Books No Yes

Conclusion
The final objective of every organization is to increase the sales revenue, and the trade
discount is the primary tool to achieve it. Cash discount is also a tool used to achieve the
objectives of the organization. Usually, the customers have the habit of bargaining and by
giving them these discounts, it enables a firm to achieve its objectives and retain the
customer. Thus, it will be a favorable situation for both the customer and the organization.

As we discussed above, it increases the purchase quantities, it also increases the credit risk of
the organization. It does not affect the profit margin of the organization as it is not recorded
in the books of accounts but more and more cash discounts decrease the firm’s profit margin.
Hence, both the discounts along with their advantages have certain disadvantages that need to
be taken care of while giving discounts.