What is the Difference Between Trade Discount and Cash Discount?
🆚 Go to Comparative Table 🆚The main difference between trade discount and cash discount lies in their purposes and the way they are applied:
Trade Discount:
- Definition: Trade discount is a reduction of amount from the list price of the goods, which the trader allows to the customer at a given rate. It is offered by a seller to the buyer of the product in the form of a reduction in the price of the item.
- Purpose: Trade discounts are offered to increase the sales of the product and make the customers feel that they are getting a better deal.
- Application: Trade discounts are applied at the time of purchase and are not recorded in the accounts as they do not affect the net sales or net income.
Cash Discount:
- Definition: Cash discounts refer to a discount that a seller offers to a buyer in return for paying a bill before the maturity of the due date. It is a discount that is offered by the seller of a product to the buyer if the payment is processed within the time limit.
- Purpose: Cash discount is offered to make the customer or the buyer pay for the product promptly, helping the business in reducing or avoiding the credit risk completely.
- Application: Cash discounts are applied once the payment is made within the specified time limit, and proper records are maintained for all such discount transactions both by the buyer and seller.
In summary, trade discounts are provided to reduce the overall price of the item and encourage more sales, while cash discounts aim to prompt customers to pay their bills before the due date, helping businesses manage their cash flow and minimize credit risk.
On this pageWhat is the Difference Between Trade Discount and Cash Discount? Comparative Table: Trade Discount vs Cash Discount
Comparative Table: Trade Discount vs Cash Discount
The main difference between trade discount and cash discount lies in their purpose and the timing of their application. Here's a table comparing the two:
| Basis of Comparison | Trade Discount | Cash Discount |
|---|---|---|
| Meaning | Trade discount refers to the reduction in the list price of the product offered by the seller to the buyer. | Cash discount refers to the discount offered by the seller on its cash payments to recover cash debts. |
| Purpose | It is offered to increase the sales of the product and as an incentive for the buyer to purchase products in large quantities. It helps build long-term relationships with customers. | It is offered to encourage the customer or the buyer to pay for the product promptly, reducing or avoiding credit risk. |
| Basis | Trade discount is based on the amount of purchase or sales, i.e., the more the sales, the more will be the rate of discount. | Cash discount is based on time, i.e., the earlier the payment made by the debtor, the higher the discount. |
| Accounting | No separate ledger account is created for trade discounts. Proper records are maintained for all such discount transactions both by the buyer and seller. | A separate ledger account is created for cash discounts. Proper records are maintained for all such discount transactions both by the buyer and seller. |
In conclusion, trade discounts are reductions in the list price of the product offered to incentivize bulk purchases, while cash discounts are offered to encourage prompt payments and reduce credit risk.
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