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A cash discount is a decrease in the value of an invoice that the seller agrees with the buyer. This discount is provided in return for the buyer paying the invoice amount before its normal date of payment. Most businesses have terms for purchases on credit on account of 2/10, net/30.
A trade discount is an amount by which a manufacturer decreases the listed price of a product when it sells to a reseller, rather than to the final customer. The amount of the trade discount changes based on who is placing the orders of the products and the quantities they are ordering.
Trade discounts and cash discounts are distinct from each other. A trade discount is given when goods are purchased in larger quantities by retailers and wholesalers from manufacturers. However, cash discounts are given by retailers to the final consumer of goods in the form of different methods of payment.
Cash Discount
Cash Discounts are the discounts or offers provided by the seller to the buyer for paying credits on or before the maturity of the due date as per the terms and conditions of the company. The company provides it to its customers for the early receipt of the due amount in cash. It is known as a sales discount from the point of the company selling the goods and a purchase discount from the point of the buyer buying the goods.
Trade Discount
Trade discount is a value or a percentage by which the listed price or the maximum retail price of goods, generally mentioned in the catalog of the manufacturer, is deducted when goods are sold by manufacturers or wholesalers to wholesalers or retailers. This discount is given to those customers who have good business relations with each other and purchase goods in large quantities.
Difference between Cash Discount and Trade Discount
Cash Discount | Trade Discount |
Cash discount is the reduction in the amount offered by the seller of a good or service to the end buyer on the invoice price. | Trade discount is the deduction in the amount offered by the seller of the goods and services to its buyer on the listed price of the product. |
Cash discount is shown distinctly than the sales made by the business. It is shown as an expense in the Statement of Profit and Loss. | Trade discount is not shown distinctly in any book of accounts. It is adjusted with the net sales value, and the net value is recorded in the books of accounts. |
A cash discount is offered as an offer for early or regular payments from the buyer. | Trade discount is offered because of reasons like bulk orders, market competition to the buyer. |
A cash discount is allowed only on cash transactions. | Trade discount is allowed on both cash and credit transactions. |
A cash discount is offered at the time of payment by the buyer. | Trade discount is offered at the time of purchase itself. |
Purpose of Cash Discount
Cash discounts can be a driving force for business sales.
Attract Bargain Hunters
Discounts are attractive properties to increase the sales of the business. When bargain hunters identify that they can pay less by using cash, they consider it to be a great deal and are likely to transact with cash in hand, so that they can take advantage of the discount. If these types of customers are around the business before the prices are increased to compensate for the discount provided, these types of customers will be ready to pay the increased amount thinking it to be a benefit of the discount.
Increase Cash on Hand
When payments from customers are received in cash, it gives more access to cash on hand for the business. Cash in hand can be utilized for purchasing assets or giving returns to customers, it is always beneficial to have cash on hand. However, if we are working with a good MSP, it is expected to receive funds from the credit card transactions very rapidly.
Reduce Chargeback Risks
In addition to the fees that naturally arise with credit card transactions, cash discount transactions can sometimes lead to additional fees. If a customer inspects their receipt or credit card statement and finds some mistakes, in that case the company has to pay some charges to go through the various parties involved to investigate the issue and settle it with the customer. Chargebacks only occur in credit card payments, so when customers are encouraged to pay in cash, it reduces the risk of a chargeback.
Purpose of Trade Discount
Trade discounts can also be an important force for driving business sales.
Increase Purchasing Power
Trade discounts are used by small businesses to increase their power of purchasing. Purchasing power is termed as the number of goods a business or individual can buy at a specific rate. Small businesses saving money through supplier or vendor trade discounts can utilize this saved capital for purchasing other assets or inputs. Additional purchases can include developments to facilities of production, recruiting more employees for output generation, or other purchases for developing business operations. Business owners may opt to invest this capital and earn interest from these investments.
Improve Goodwill
Manufacturers, suppliers, vendors, and businesses often enhance their goodwill in the business environment through the use of granting credit facilities in their business. Goodwill is the value or attractive factor that a company creates with its customers by offering low prices, good customer service, or high-quality goods or services in the business environment. Trade discounts can also help expand goodwill if companies offer greater discounts to businesses or individuals, providing regular business to the supplier or vendor.
Higher Consumer Sales
Owners of businesses may agree to offer trade discounts to customers on goods or services sold by the company. These discounts can include promotional sales, coupons, volume purchases, or other similar strategies of pricing the product. Even though trade discounts decrease the amount of gross profit on the sale of particular goods or services, companies often cover up this profit back through volume sales. Consumers paying a lower product rate may opt to buy more quantities to take advantage of the trade discounts of the company.
Conclusion
Cash Discounts are the discounts or offers provided by the seller to the buyer for paying credits on or before the maturity of the due date as per the terms and conditions of the company. Trade discount is a value or a percentage by which the listed price or the maximum retail price of goods, generally mentioned in the catalog of the manufacturer, is deducted when goods are sold by manufacturers. Trade discounts and cash discounts are distinct from each other. A trade discount is given when goods are purchased in larger quantities by retailers and wholesalers from manufacturers. However, cash discounts are given by retailers to the final consumer of goods in the form of different methods of payment.
