Businesses all over the world use a tried and tested process of increasing sales of the products by offering discounts. Discount results in the reduction of the selling price of the product, which makes it more attractive for the customer.
Reduction in price makes a psychological impact on the customer which results in the purchase. The two types of discount offered are trade discount and cash discount.
Meaning of Trade Discount
Trade discount is referred to as the discount that is offered by a seller to the buyer of the product in the form of reduction in the price of the item.
Trade discounts are offered to increase the sales of the product and make the customers feel that they are getting the best offer. No accounts are maintained for keeping track of the discounts that are offered.
Meaning of Cash Discount
Cash discount is referred to as the discount that is offered by the seller of a product to the buyer at the time of payment for the purchase. This reduction is provided at the value of the invoice.
Cash discount is offered to make the customer or the buyer pay for the product promptly, it helps the business in reducing or avoiding the credit risk completely.
Such discounts are mostly used in business transactions, where a creditor will be reducing the amount to be paid by the debtor, if the payment is processed within the time limit.
Proper records are maintained for all such discount transactions both by the buyer and seller.
These points highlight the differences between the trade discount and cash discount.
| Basis of Comparison | Trade Discount | Cash Discount |
| Meaning | It is the type of discount that is offered by the seller to the buyer as a reduction in the price of the product | This discount is offered by the seller to the buyer on the invoice amount at the time of making payment within the stipulated time |
| Purpose of offering discount | To ensure bulk sales of the product | To ensure prompt payment for the items purchased |
| Accounting treatment | Not shown in any books of accounting, reduction adjusted with final price and the discounted price is added to record books | It is properly recorded in the books of both buyer and seller. Recorded in profit and loss statement as an expense |
| When discount is allowed | At the time the purchase is made | It is allowed at the time of payment |
| Allowed on transactions | Both cash and credit transactions | Only transactions involving cash payment are allowed. |
This completes the article on differences between Trade discount and Cash discount. To read more of such interesting concepts in Commerce, stay tuned to BYJU’S.
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As an expert in the field of commerce and business practices, I bring a wealth of knowledge and experience to elucidate the concepts presented in the provided article on the differences between trade discount and cash discount.
Firstly, the article correctly emphasizes the ubiquitous use of discounts as a strategy to boost sales in businesses worldwide. I can attest to the fact that this is a common and effective approach employed by various industries to attract customers and drive purchases.
Now, let's delve into the specifics of trade discount and cash discount:
Trade Discount:
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Meaning: Trade discount is a reduction in the price of a product offered by a seller to the buyer. This discount is not separately accounted for and is primarily aimed at promoting bulk sales, creating an impression of an attractive deal for the customer.
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Purpose of Offering Discount: The primary purpose of a trade discount is to stimulate bulk sales of the product. It serves as an incentive for buyers to purchase in larger quantities, fostering a sense of getting the best offer.
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Accounting Treatment: Trade discounts are not shown in any accounting books. Instead, the reduction is adjusted with the final price, and the discounted price is added to the record books.
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When Discount is Allowed: Trade discounts are allowed at the time of the purchase, influencing the initial buying decision.
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Allowed on Transactions: Trade discounts can be applied to both cash and credit transactions, providing flexibility in sales strategies.
Cash Discount:
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Meaning: Cash discount is a reduction in the price of a product offered by the seller to the buyer at the time of payment. This discount is aimed at ensuring prompt payment, helping businesses reduce or avoid credit risks.
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Purpose of Offering Discount: Cash discounts are designed to encourage customers to pay for the purchased items promptly. This benefits businesses by improving cash flow and minimizing credit risks.
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Accounting Treatment: Cash discounts are properly recorded in the books of both the buyer and the seller. They are recorded in the profit and loss statement as an expense for the seller.
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When Discount is Allowed: Cash discounts are allowed at the time of payment, providing an incentive for buyers to settle their accounts within the stipulated time frame.
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Allowed on Transactions: Cash discounts are applicable only to transactions involving cash payment. They play a crucial role in scenarios where creditors reduce the amount payable by debtors if payment is made within the specified time limit.
In conclusion, the article effectively highlights the distinctions between trade discount and cash discount, shedding light on their meanings, purposes, accounting treatments, timing of allowance, and applicability to different types of transactions. For those interested in further exploration of commerce concepts, the article encourages staying tuned to additional content from BYJU’S, providing a comprehensive resource for commerce enthusiasts.
