Trade Discount vs Cash Discount
1. Trade discount is a reduction granted by a supplier of goods/services on the list or catalogue prices of the goods supplied.
2. It is provided due to business consideration such as trade practices, large quantity orders, market competition, etc.
3. Trade discount is not separately shown in the books of accounts; all net amounts after discount are recorded in the subsidiary books of accounting.
4. It is allowed on both credit and cash transactions.
5. Trade discount is given on the basis of purchase.
6. There is no separate journal entry for trade discount allowed or received as it is not recognized as an expense for the business.
Example for Trade Discount
10 vehicles were purchased by Unreal Pvt Ltd with a 5% trade discount on the list price of 1,00,000 each.
Total List Price = 10 x 1,00,000 = 10,00,000
Total Discount = 5% of 10,00,000 = 50,000
Final Invoice Price after TD = 10,00,000 – 50,000 = 9,50,000
Related Topic – How to Show Trade Discount in Purchase Book?
1. Cash discount is a deduction allowed by a supplier of goods or by a provider of services to the buyer from the invoice price.
2. It is provided as an incentive or a motivation in return for paying a bill within a specified time.
3. Cash discount is shown separately in the books It is shown as an expense in the Profit and Loss A/C.
4. It is only allowed on cash payments.
5. Cash discount is given on the basis of payment.
6. Journal entry for cash discount received by a business;
Also, journal entry for cash discount allowed by a business;
Example for Cash Discount
Let’s continue the example above for the trade discount. Assuming that the supplier, in addition, extended a cash discount of 2% 10 Net 30 days.
This means that if the buyer pays within 10 days of delivery, they can avail an extra 2% discount on the invoice price.
So, Invoice Price = 9,50,000
2% of 9,50,000 = 19,000
Net amount to be paid within 10 days = 9,50,000 – 19,000 = 9,31,000
For Accounting Practice