Trade Discount vs Cash Discount Differences

Discounts are an integral part of business trade. Since time immemorial, it has been part of the transactions that buyers offer and sellers receive either implicitly or explicitly. Two such vital types of discounts are:

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  • Trade discountTrade DiscountThe reduction in list price allowed by a supplier to the consumer while selling the product in bulk quantities is referred to as a trade discount. It is carried out in order to boost the sale of the business.read more is provided by the seller at the time of purchase to attract customers and increase sales. More importantly, the sellers are interested in those customers who are interested in buying bulk quantities. Since it is offered at the time of purchase, it is often implicitly part of the prices of the products and is included in the transaction before the billing statement is printedThe Billing Statement Is PrintedBilling statement template makes it easy to generate the transaction receipts which can be easily printed, emailed to the customer any time. These could be implemented for billing invoices, customer account relationship management including general invoicing.read more.Cash discount, on the other hand, is offered at the time when the seller offers payments and is calculated as an additional deduction on the printed invoice. It is offered subject to certain conditions, incentivizing the buyer to make a large part of the payment upfront and pay the remaining installments as soon as possible.

Example of Trade and Cash Discount

Consider a tractor maker XYZ and an ABC firm who buys the tractor from them, with the price of each tractor being 5,00,000. Assuming ABC buys 50 tractors in total as a part of an annual contract and XYZ offers a trade discount of 10% to ABC. Then

  • List price = 5,00,000 * 50 =$2,50,00,000Trade discount = 10% = 10% * 2,50,00,000 = $25,00,000

The amount payable as per invoice = List price – discount

  • = 2,50,00,000 – 25,00,000= $2,25,00,000

ABC was liable to pay this payment in 90 days. Let’s assume that XYZ, in an effort to get payment early, offers an additional discount of 3% to ABC if it makes these payments in 30 days. In that case the calculations will be:

  • Amount payable as per invoice = $2,25,00,000Cash discount = 3% = 3% * 2,25,00,000 = $6,75,000

  • Amount payable (within 30 days) = 2,25,00,000 – 6,75,000= $2,18,25,000

Please note that the trade discount calculation happens before printing the invoice, while the seller offers a cash discountCash DiscountCash discounts are direct incentives and discounts provided by any company to their customers in exchange for paying their bills on time or before the due date. This is a common practice, and the discount may differ from one company to the next depending on the terms and conditions.read more on the final payment. 

Trade vs. Cash Discount Infographics

Critical Differences Between Trade and Cash Discount

  • Trade discounts are typically offered as a part of a discount policy to the seller. Hence most of the time, this discount is already taught in the listed prices of the products. It contrasts the cash discount, which is offered over and above the listed price.Trade discounts though part of the catalog itself may vary a bit based on the quantity purchased by the buyer. It is because the main incentive of this discount is to make sure that the buyer goes for bulk quantity. It’s a win-win situation for both parties. For buyers, the unit priceThe Unit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.read more per quantity decreases, which increases the marginal utilityMarginal UtilityA customer’s marginal utility is the satisfaction or benefit derived from one additional unit of product consumed. It could be calculated by dividing the additional utility by the amount of additional units.read more in economic terms. For the seller, as more and more quantity is sold, his quantity sold per customer increases leading to better throughput and warehouse efficiency. Now he would have to spend less cost on storage and distribution.Trade discount is a mechanism used by the seller to make sure that it retains the buyer not only for this transaction but also for future transactions making him a repeat buyer. It is mainly a part of a long-term strategy wherein the buyer wants to decrease its distribution, marketing, sales, and other transactional costs. A cash discount, on the other hand, is more about getting payments as quickly as possible. Through this, the seller wants to ensure that he gets payments fast, upfront, and in full rather than in installments.Since it is more quantity specific rather than focused on the transaction cost, it is mainly offered by the wholesalers to retailers. There is less credit risk as the focus is mainly on increased throughput and repeat business for buyers and sellers. Retailers mainly offer a cash discount to consumers. The transaction size is less, and the credit risk is more.Since trade discounts are already taught in the product prices displayed in the catalog, they are not recorded in books. A cash discount is not part of market prices and is offered over and above. Hence, they are recorded in the books for both sellers and buyers.Trade discount varies with the products and the quantity purchased by the seller. A cash discount is more specific to the timing of payments and installments. The aim is to get upfront payment instead of installments in the future. As a thumb rule – the less the installments, the more is the discount.Trade discount is product specific and is not discriminated against based on the payment mechanism. As cash discount is more focused on reducing credit risk and delay of future installments, it is offered only to customers who make payment at the time of delivery, preferably in cash.

Comparative Table

Final Thought

Both discounts are essential types of discounts in business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more. Though the primary aim is the same, i.e., to attract more customers and increase sales, they differ in the mode, mechanism, and timing they are implemented. More importantly, they help sellers retain customers and receive payments early, thereby reducing payment and credit riskCredit RiskCredit risk is the probability of a loss owing to the borrower’s failure to repay the loan or meet debt obligations. It refers to the possibility that the lender may not receive the debt’s principal and an interest component, resulting in interrupted cash flow and increased cost of collection.read more.

This article is a guide to the Trade Discount vs. Cash Discount. Here we discuss the top differences between trade and cash discounts, infographics, and a comparative table. You may also have a look at the following articles –

  • Credit Risk ExamplesTrade Receivables MeaningCash Dividend MeaningFinancial Accounting