What is a Share? Difference Between Two Types of Shares
Tags :
Accounts,Chapter: Books of Original Entry- Journal Entry,Class 11,Topic: Difference Between Trade Discount and Cash Discount
Share This :
Difference Between Cash Discount and Trade Discount
01/08/2025
Accountancy,
Class 11,
Books of Original Entry- Journal Entry
In the business world, offering discounts is a common strategy used to increase sales and improve financial efficiency. Two frequently applied types of discounts are cash discounts and trade discounts. Although both are reductions in price, they serve different objectives and are applied at different stages in the buying and selling process.
Let’s explore what these discounts mean, how they function, their significance, and the major differences between the two.
What is a Trade Discount?
A trade discount is a price reduction provided by sellers to buyers, particularly retailers or wholesalers, at the time of purchasing goods. It is typically granted for placing large orders or to reward loyal, long-term business clients. The main aim is to encourage bulk purchases and strengthen professional ties.
Example:
Suppose a distributor purchases 100 items listed at ₹1,000 each. If the seller offers a 10% trade discount, the cost per item after discount becomes ₹900, making the total payable amount ₹90,000 instead of ₹1,00,000.
Important Points about Trade Discount:
- It is calculated before the sale is recorded.
- Based on quantity or relationship with the buyer.
- It does not appear in the invoice or accounting books.
- Mentioned in price lists or quotations but not in the financial statements.
What is Cash Discount?
A cash discount, sometimes called an early payment discount, is offered to customers who make payments within a specific time frame. This type of discount promotes quicker payments and helps businesses maintain better liquidity.
It is generally written in terms such as 2% discount is available if the bill is paid within 10 days; otherwise, the full amount is due within 30 days.
Example:
If a seller raises an invoice for ₹1,000 on July 1st with terms 2% discount if the bill is paid within 10 days the buyer can get a ₹20 discount by paying ₹980 before July 10. If the payment is made after this date, the full ₹1,000 is payable.
Important Points about Cash Discount:
- Offered after the sale has been made.
- Given for prompt payment.
- It is shown separately in financial records.
- Appears in invoices, receipts, or credit notes.
Why Do Businesses Offer Discounts?
Reasons for Trade Discount:
- To encourage bulk buying or large orders.
- To reward loyal business customers.
- To offer competitive rates in the market.
Reasons for Cash Discount:
- To ensure faster receipt of payments.
- To maintain healthy cash flow.
- To reduce chances of bad debts or payment delays.
How Are These Discounts Accounted for?
Trade Discount:
- This discount is not recorded in the books of accounts.
- The sale is recorded at the net amount after discount.
- It does not require a separate journal entry.
Cash Discount:
- This is recorded in the accounts.
- For the seller, it is termed as discount allowed (an expense).
- For the buyer, it is termed as discount received (an income).
Comparison Table: Cash Discount vs Trade Discount
If a seller raises an invoice for ₹1,000 on July 1st with terms 2% discount if the bill is paid within 10 days the buyer can get a ₹20 discount by paying ₹980 before July 10. If the payment is made after this date, the full ₹1,000 is payable.
| Aspect | Trade Discount | Cash Discount |
|---|---|---|
| Purpose | Encourage large or wholesale purchases | Encourage early or prompt payment |
| Timing | Applied at the time of purchase | Applied at the time of payment |
| Accounting Entry | Not recorded in books | Recorded as expense/income |
| Shown in Invoice | No | Yes |
| Based On | Order quantity or relationship | Payment made within a time limit |
Impact on Business
Advantages of Trade Discount:
- Attracts bulk buyers
- Encourages large volume transactions
- Enhances customer loyalty among regular clients
Advantages of Cash Discount:
- Improves cash flow and working capital
- Reduces the chances of delayed payments or defaults
- Encourages disciplined payment behavior
Challenges:
- Offering trade discounts may reduce the profit margin.
- Cash discounts, if overused, may lead to loss in revenue.
- Customers may begin to expect discounts regularly, which can reduce pricing power.
Practical Example for Clarity
Imagine you’re running a wholesale garment store. For your regular distributor who buys in bulk, you provide a 15% trade discount. This helps maintain a long-term relationship and drives large orders. On the other hand, for smaller shop owners, you give a 2% cash discount if they settle their bills within 7 days. This ensures you receive money quickly, which helps with day-to-day business expenses.
Conclusion:
Both cash discounts and trade discounts are vital tools for business success. While one promotes volume-based purchasing, the other encourages timely payments. The key is knowing when and how to apply them to achieve desired outcomes — be it customer retention, increased sales, or improved financial health.
- Choose trade discounts to attract big buyers and grow your order size.
- Use cash discounts to boost liquidity and reduce credit collection time.
By incorporating both discounts strategically, a business can enhance customer relationships, optimize revenue flow, and strengthen its overall financial position.
Have Any Question?
Wish to enquire about our teaching pedagogy? Contact Us via Call or Email
- +91-9136-336-336
- contact@uniquelearning.in