When you are offered a trade discount or cash discount, it can be difficult to know which one is the best deal. Both offer savings on the purchase price of an item, but they work in different ways. In this blog post, we will explain the difference between trade discounts and cash discounts, and help you decide which one is right for you.
What is Trade Discount?
Trade Discount is a reduction in price given by the manufacturer or wholesaler to the retailer. Trade discount is also known as “allowance.” Trade discounts are offered to encourage the retailer to buy more products or to help the retailer clear old stock. The Trade Discount is usually calculated as a percentage of the list price.
For example, if a product has a list price of $100 and a trade discount of 10%, the retailer will pay $90 for the product. Trade Discounts are different from Cash Discounts, which are offered to customers who pay their bills within a certain period of time. Trade Discounts are also different from Quantity Discounts, which are offered to customers who purchase large quantities of products.
What is Cash Discount?
- A cash discount is basically a deduction in price given to customers who pay their bills on time or before the due date. This not only benefits the customer but also helps the company to get its payment early and hence maintain a good cash flow.
- Cash Discounts are usually offered by businesses that are related to services or products that have a longer shelf life. For instance, Cash Discounts are not given on fast food items as they have to be consumed immediately and there is no scope of selling them at a later date.
- Also, Cash Discounts help in reducing the overall cost as businesses don’t have to bear the extra charges of late payments. In some cases, Cash Discounts are also offered to attract new customers and boost sales. Overall, Cash Discount is a great way for businesses to save money and for customers to get a cheaper deal.
Difference between Trade Discount and Cash Discount
Trade discounts are given by the suppliers to the customers with the intention to promote sales. Trade discounts are mostly given to middlemen such as wholesalers, retailers, etc.
- A middleman can further give some discount from the trade discount to promote sale. For example, a garment manufacturer gives 10% trade discount to a wholesaler. The wholesaler in turn gives 5% discount to a retailer. So, in this case, the retailer gets the goods at 85% of the list price. Trade discounts are also called as functional discounts.
- Cash discount is the reduction in price given by the seller to the buyer if he makes the payment within the specified time period. It is offered as an incentive for prompt payment.
- For example, 2% cash discount is offered if the payment is made within 30 days from the date of invoice. These days cash discounts are mostly tattoos automatically by using computer softwares.
The reduction in price on account of cash discount is directly debited in the profit and loss account of the business as a reduction in turnover. Cash discounts are also known as courtesy or promptness discounts. Trade Discount and Cash Discount are shown separately in Trade invoices.
When it comes to discounts, there are two main types: trade and cash. A trade discount is offered when a buyer trades in products or services they already own to receive a reduced price on the new product or service. A cash discount, on the other hand, is given when the buyer pays for their purchase immediately (usually with cash).