Trade Discount vs Cash Discount

Difference Between Trade Discount vs Cash Discount

Trade discount is referred to a discount that is granted by the seller of the goods to the buyer on the list price or catalog prices of the goods supplied mostly in case of bulk sales. E.g. a wholesaler with a high volume purchase will get a 30% of trade discount. In comparison, a medium volume wholesaler might get a 20% of trade discount, on the other hand, cash discount, similarly, is referred to as the discount granted by the seller of the goods to the buyer on the invoice price of the company. A cash discount is offered mostly to facilitate a prompt payment from the buyer. E.g., if the invoice is due to be paid by the buyer in 20 days, and the payment is made within 10 days, the seller can offer a cash discount of let’s say 5% to the buyer on the invoiced price.

Head to Head Comparison Between Trade Discount vs Cash Discount (Infographics)

Below is the top 5 difference between Trade Discount vs Cash Discount:

Key Differences between Trade Discount vs Cash Discount

Both Trade Discount vs Cash Discount are popular choices in the market; Let us discuss some of the major differences between Trade Discount vs Cash Discount:

Meaning

To increase sales revenue and attract more buyers, every company offers trade and cash discounts. Trade discounts are more prominent in business-to-business transactions, where the buyers are usually wholesalers and therefore, prefer to buy in bulk quantities. On the other hand, cash discounts are offered to any buyer who makes the payments on time.

Price

Trade discount is offered on the list price or the catalogue price that the buyer sees at the time of purchase. The list price gets reduced by a certain percentage depending on the quantity purchased. A cash discount is offered to the buyer on the invoice or billed price of the goods and services. It is the price at which the product is finally billed, and the buyer needs to pay it.

The timing of the offer

Since the trade discount is decided based on the quantity being purchased by the buyer, we can say it is offered only at the time of purchase. This sale done can, however, be cash or credit sales for the company. Whereas, in case of cash discount a bill is already generated, but if the payment is made much ahead of the payment date, some percentage of discount is offered on this billed or invoice rate. Hence, the cash discount can be said offered only on cash sales.

Accounting Treatment

Trade discounts are adjusted with the sales prices and therefore, are not shown separately in any books of accounts of the company. Cash discounts, on the other hand, are made later than the time of sales done, therefore, is shown as an expense in the Profit and Loss statement of the company.

E.g.

Let us say ABC purchased goods worth $1,00,000 from company X on April 1, 2013. X allowed a 10% trade discount to ABC since a bulk purchase is made. Therefore, the sales amount is $90,000 for Company X. Further, the same $90,000 was to be paid by ABC by June 30, 2013. However, ABC paid the entire amount of $90,000 by June 2, 2013. Since it was an early payment, company X offered a cash discount of $5000, and therefore the payment made by ABC was $85,000 only. This $5,000 also becomes an expense for X. In short, a sale was made for $90,000, against which it received Cash of $85,000 and expenditures of $5,000.

Trade Discount vs Cash Discount Comparison Table

Let’s look at the top 5 Comparison between Trade Discount vs Cash Discount

Basis Of Comparison	Trade Discount	Cash Discount
Meaning	It is the deduction offered by the seller of the goods and services to its buyer on the listed price of the product.	It is the deduction offered by the seller of a good or service to the end buyer on the invoice price.
Reason to offer the discount	It is offered due to business reasons like bulk orders, market competition.	It is offered as an incentive for early or timely payments from the buyer.
Accounting Treatment	It is NOT shown separately in any book of accounts. It is adjusted with the final sales figure, and the net value is entered in the required books.	It is shown separately than the sales are made. It is shown as an expense in the Profit and Loss Account.
Allowed on all payments	It is allowed on both cash and credit transactions.	It is allowed only on cash transactions.
Time of allowing a discount	It is offered at the time of purchase itself.	It is offered at the time of payment by the buyer.

Conclusion

Trade discounts vs Cash discounts are two of the common methods used by any company to attract wholesale buying and timely payment by their buyers and consumers. The end motive is to generate considerable sales revenue and increase it over time. These act as primary tools to achieve this goal. However, these discounts offered also have a downturn with them. Trade discounts would mean more and more of sales on credit. There would be a good amount of risk attached to it for the recovery on time. Similarly, for cash discounts, since it is an expense shown in the books, it will start reducing the profit margin of the business.

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