A 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 difference between trade discount and cash discount is that ledger account is opened for a cash discount, but not for a trade discount.
One of the easiest ways to increase sales and so boost profit, used by various traders, businessman, and shopkeepers all around the world, is to offer a discount. It is simply a reduction in the selling price of the goods, which not only attracts customers, but also persuades them to make more sales. It is classified as trade discount and cash discount.
The article excerpt presented to you will help you learn some more differences, take a read.
Content: Trade Discount Vs Cash Discount
|Basis for Comparison||Trade Discount||Cash Discount|
|Meaning||A discount given by the seller to the buyer as a deduction in the list price of the commodity is trade discount.||A deduction in the amount of invoice allowed by the seller to the buyer in return for immediate payment is cash discount.|
|Purpose||To facilitate a bulk sales.||To facilitate a prompt payment.|
|Invopice||It is shown in invoice as a deduction itself.||It is not shown in invoice.|
|When allowed?||At the time of purchase.||At the time of payment.|
|Allowed to all customers||Yes||No|
|Entry in books||No||Yes|
|Vary with||Time period, when payment is made.||Quantity of goods purchased or amount of purchases made.|
Definition of Trade Discount
Trade discount is referred to as a discount, given by the seller to the buyer at the time of purchase of goods, as a deduction in the list price of the quantity sold. The trade discount is used by the sellers to attract more customers and increase the quantity sales. There is no record maintained in the books of both the buyer and seller for such a discount.
Definition of Cash Discount
Cash Discount is referred to as a discount, allowed to customers by the seller at the time of making the payment of purchases, as a reduction in the invoice price of the commodity. A cash discount is used by the sellers to facilitate a prompt payment and thereby to avoid the credit risk. Both the buyers and sellers keep a proper record of such discount in their books of accounts.
Key Differences Between Trade Discount and Cash Discount
- Trade discount is given on the catalogue price of the goods while the cash discount is given on the invoice price.
- Trade discount is granted with the aim of increasing the sales in bulk quantity, whereas Cash discount is granted to facilitate a quick payment.
- Trade discount is allowed to all customers while the Cash discount is allowed to those customers, who purchase goods in cash.
- In the case of Trade Discount, no entry is made in the books of accounts, while the proper entry is made in the books of accounts for the cash discount.
- A trade discount is shown as a deduction in the invoice. Conversely, a cash discount is not shown at all.
- The cash discount may differ with the time period, within which payment is made by the customer. On the contrary, trade discount may differ with the quantity of goods purchased and amount of purchases.
- Trade discount is allowed at the time of purchase while the cash discount is allowed at the time when the payment is made.
Example with Journal Entry
Suppose James purchased goods from Ali of the list price of Rs. 5000, on April 1, 2016. Ali allowed 10% discount to James on the list price, for purchasing goods in bulk quantity. Further, a discount of Rs. 200 was allowed to him, for making immediate payment.
Answer: First of all, the discount allowed on the list price of the goods, i.e. 10% of Rs. 5000 = Rs. 500, is a trade discount, which is not going to be recorded in the books of accounts. Next, the discount received by James of Rs. 200 for making quick payment is a cash discount, as it is allowed on the invoice price of the goods. Cash discount is entered in the books of accounts. Therefore the journal entry in the books of James is:
The ultimate objective of every organization is to increase the sales revenue, and these two discounts are the primary tool to achieve it. Usually, the customers are habitual of bargaining and by giving them these discounts, enable a firm to achieve its objectives and sustain the customer for his brand. Thus, it will be a win-win situation for both the customer and the organisation.
Although trade discounts increase the purchase quantities, it also increases the credit risk of the firm. Also, more and more cash discounts decrease the firm’s profit margin. Hence, both the discounts along with their benefits have certain flaws that need to be taken care of while giving the discounts.