Cash Discount
A cash discount is a deduction allowed by the supplier of goods or by the provider of services to the buyer from the invoice price. This is done as an incentive in return for paying a bill within a specified time.
Usually, the supplier will reduce the amount owed by a small percentage, e.g. 2%. It can be used by a business to improve the Days Sales Outstanding (DSO). It is not necessary for the supplier to offer a cash discount.
It is shown as an expense in the income statement (profit and loss account)
Few Benefits of Cash Discount
- A cash discount is beneficial to the supplier as it allows him to have access to cash much sooner and therefore ensure liquidity to the business.
- If used efficiently, a cash discount is beneficial to the buyer as not a mere tool to save some money, but also as a means of maintaining a healthy credit line and a good relationship with the supplier.
Related Topic – How to show Trade Discount in Purchase Book?
Example
Common terms are 2/10, Net 30 (or) 2%/10 days, Net 30. This payment term means that the buyer has an option to avail a 2% cash discount from the invoice price if the payment is made within the first 10 days of receiving the invoice.
If the cash discount is not availed, the net amount due is to be paid within Net 30 days. The payment terms can be modified depending on the supplier’s needs.
Let’s say that 100 keyboards are sold for the invoice price of 300 each and the payment terms are 1/10, Net 30 days.
It means that the buyer will get a 1% cash benefit from the total invoice price if the payment is made within the first 10 days of receipt of the invoice. (Assuming there is no trade discount)
| Amount due as per Invoice | 30,000 |
| Less Cash Discount 1% | 300 |
| Cash to be paid within 10 days | 29,700 |
The buyer has a choice to not avail the discount. In this case, the total amount due will be 30,000 which can be paid within 30 days.
Short Quiz for Self-Evaluation
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