TRADE DISCOUNT VS CASH DISCOUNT

As every accountant knows, there are two types of discount: trade discount and cash discount.

A trade discount is a discount given by a seller to a buyer in the form of a price reduction on the goods purchased.

It is an allowance granted by a seller to a buyer who purchases goods in quantities up to or above a particular quantity.

Trade discount can also refer to the difference between list price and net price.

For example, if the list price (price offered by the seller) of a commodity is N1000 and the trade discount offered by the seller is 10%, It follows that the cost of the commodity to the buyer is 900.

Trade discount is not recorded in the books of accounts. Evidence of trade discount can only be found in the invoice.

The purpose of a trade discount is to encourage bulk purchasing of goods and services.

A cash discount, on the other hand, is a discount offered by a seller to encourage the buyer to pay for goods and services promptly.

It is a deduction made at the moment of settlement from trade receivables and payables.

For example, if James buys products costing N500 on credit for 30 days, he must pay N500 within 30 days.

If, however, he is offered a 5% cash discount if he pays within 10 days, he will pay N475 instead of N500 if he settles his debt within the 10 days.

The purpose of a cash discount is to encourage prompt payment for goods and services 

Differences between cash discount and trade discount.

1. Cash discount is recorded in the books of account, whereas trade discount is not recorded in the books of account. 

The invoice is the only place where the trade discount is recorded.

2. Cash discount is offered to encourage prompt payment of debt whereas a trade discount is offered to encourage bulk purchases of goods.

3. A trade discount is applied to the list price of products, whereas a cash discount is applied to the amount owed.

4. Just as its name seems to suggest, cash transaction is only allowed on cash transactions.

In contrast, trade discounts may be given on both cash and credit transactions.

5. Unlike trade discounts, which are usually given as a fixed percentage, cash discounts are not always given as a fixed percentage.

6. A cash discount is applied when the buyer makes a payment, but a trade discount is applied when the buyer enters a purchase order

7. The subsidiary books do not reflect the trade discount. In the subsidiary book, just the net amount is shown.

In contrast, cash discounts are shown in the subsidiary books; Discounts allowed appear on the debit side of the cash book while discounts received to appear on the credit side of the cash book.

To conclude, the major difference between a trade discount and a cash discount is that a trade discount is a discount offered in the form of price reduction aimed at encouraging bulk purchases, whereas a cash discount is a discount aimed at encouraging prompt payment for goods and services.

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