Trade and cash discount

Trade and cash discount

What Is Trade Discount?

Trade discount is the reduction granted by the supplier/vendor from the list price of products/services on business considerations such as quantity bought, trade practices, etc. List price is also called as catalog price and it is the price that is printed on the product or in the catalog of products/services.

Example of trade discount:-

10 machines are sold at the list price of Rs 50000 each
Trade discount granted is 5%

calculate the trade discount amount and amount payable to supplier.

Solution:-

10 machines @ Rs 50000 each = Rs 500000
Trade discount @ 5% = Rs 25000
Amount payable to supplier = 500000 – 25000 = Rs 475000

What Is Cash Discount?

Cash discount is the reduction granted by the supplier/vendor from the invoice price of products/services in consideration for quick payment or payment within stipulated period.

Example of cash discount:-

In the trade discount example above,  lets say that the supplier is also willing to grant cash discount in addition to trade discount if the payment is made within specific period. Let us assume that he is willing to give a cash discount of 2% if the payment is made within 15 days and 1% if the payment is made within 30 days. No cash discount would be granted if the payment is made after 30 days.

Calculate the cash discount amount and amount payable to supplier if payment is made within 15 days, 30 days and after 30 days.

Solution:-

If payment is made within 15 days:-
10 machines @ Rs 475000
Cash discount @ 2% = Rs 9500
Amount payable to supplier = Rs 465500

If payment is made within 30 days:-
10 machines @ Rs 475000
Cash discount @ 1% = Rs 4750
Amount payable to supplier = Rs 470250

If payment is made after 30 days:-
10 machines @ Rs 475000
No cash discount in this case
Amount payable to supplier = Rs 475000

Difference Between Trade Discount And Cash Discount:-

Trade Discount Cash Discount
Trade discount is the reduction granted by vendor from the list price of products/services. Cash discount is the reduction granted by vendor from the invoice price of products/services.
Trade discount is granted to promote the sales. Cash discount is granted to promote the prompt payment
Trade discount is shown by the way of deduction in invoice. Cash discount is not shown on the invoice.
Trade discount account is not opened in the ledger. Cash discount account is opened in the ledger for discount received and discount allowed separately.
Trade discount may vary with the quantity purchased. Cash discount may vary with the period within which payment is made.

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