TRADE DISCOUNTS & CASH DISCOUNTS

What is a Discount?
A discount is a reduction in price or amount offered to customers so that they:
i) buy goods from the business in large quantities
ii) pay faster or within a specified date the amount owing from them
iii) buy goods from the business more frequently
iv) buy goods in cash rather than on credit

Types of discounts:
a) Trade discount: given to customers for bulk buying
b) Cash discount: given to debtors for paying their amount owing within a specified date

Discount

Trade Discount Cash Discount

Discount Allowed Discount Received

What is Discount Allowed?

Discount allowed is cash discount given to debtors for prompt and faster payment by them.
 Discount allowed is always an expense for a business and will reduce its short term profits.
 Discount allowed always improves cash position for a business because a business will receive
cash faster, which can then be used for other purposes.

What is Discount Received?

Discount received is cash discount given by suppliers for prompt and faster payment to them.
 Discount received is always an income for a business and will increase its short term and long
term profits.
 Discount received always improves cash position for a business because a business will have
saved extra cash, which can then be used for other purposes.

Differences between trade discount and cash discount:

Trade discount
1) is given to encourage bulk buying
2) is deducted from selling price (list price)
3) does not appear in the ledgers (T-accounts)
4) appears in the day books and invoice
5) percentage rate is usually higher
than that for a cash discount
Cash discount
is given to encourage prompt payment
is deducted from debtor’s balance
appears in the ledgers (T-accounts)
does not appear in the day books and invoice
percentage rate is usually lower
than that for a trade discount

Similarities between trade discount and cash discount:

1) when allowed, both reduce short term profits of a business.
2) when received, both increases short term profits of a business.
3) when allowed, both encourage customers to buy more from the business, thus increasing the
long term profits of the business.
4) both are calculated with percentage rates determined by the business.

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