Difference between Trade discount and Cash discount

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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