Trade Discount vs Cash Discount

Discount!! Sale!! Offer!!These words excite every person regardless of age, sex, and colour. Discount is a very common term in businesses too. Discounts are offered by businesses to attract potential customers and induce them to buy more products. Discount is one of the easiest ways used by various traders, businessmen, and shopkeepers all around the world to increase sales and boost profit. Discount simply means a reduction in the selling price of the goods. Anytime you tell a customer that he can save money, you’re likely to get his attention. Discounts
don’t just help customers but they helpbusinesses too. From increased sales to improved reputation business success can be greatly influenced by this one factor called Discount which is seldom taken seriously.


In Accounting or Business parlance, 2 forms of Discounts are common. Trade Discount and Cash Discount.


Let us analyse what these discounts mean and how they differ from each other.


trade discount is one that is allowed by the wholesaler to the retailer, calculated on the list price of the product, whereas cash discount is allowed to stimulate instant payment of the goods purchased. The main intention of offering Trade Discount is to facilitate a bulk sales and the main objective of cash discount is to facilitate a prompt payment. It is important to note that Trade discount is never shown separately in the books of accounts as it is shown in invoice as a deduction itself. But when Cash discount is shown it is shown separately in the books as an expense in the Profit and Loss A/c. Another point of difference is Trade discount is allowed on both credit and cash transactions but Cash Discount is allowed only on Cash transactions.


Let us understand the concept of Trade Discount and Cash Discount with an example


ABC Computers LLC sold 10 Laptops to its Customer with a 5% Trade Discount on the list price of AED 3,000 each. ABC Computers LLC in addition extended a cash discount of 2% 10 Net 30 days.


Trade Discount

Total List Price = 10*3,000 = AED 30,000

Total Discount = 30,000*5% = AED 1,500

Final Invoice Price after Trade Discount = AED 30,000 – AED 1,500 = AED 28,500

Cash Discount

Invoice Price = AED 28,500

2% of AED 28,500 = AED 570

Net amount to be paid within 10 days = AED 28,500 – AED 570 = AED 27,930


The accounting entry in the books of ABC Computers LLC will be:


Customer’s Account                Dr.                   28,500                                   Trade Discount

To Sales Account                                             28,500


Cash Account                          Dr.                   27,930                                         Cash Discount

Discount allowed Account                                   570

To Sales Account                                            28,500

About the author

FAME is a leading Accountancy training provider. FAME brings together under one roof a wide range of accounting courses blended with real world experience and practical application. FAME aims to bridge the gap between theoretical knowledge and practical challenges that accountants face in their day to day working. We provide practical workplace skills for finance staff meeting the needs of employers, bankers, government and learners, both now and in the future. Our students are integral to the success of an organisation and at the heart of ensuring the smooth running of an accounting department.