Sunday, June 14, 2020

What is Trade Discount and Cash Discount


In this article, We will understand what is Trade discounts and Cash discounts. But before an understanding of cash and trade discounts, we must understand, what is a discount?

What is a Discount?

In simple term, Discount means a percentage which is allowed for deduction from selling price and the price which is fixed by the seller for buyer after negotiation between them. 

Discount is common everywhere nowadays. Because every buyer wants to purchase on discounted price. Discount offering by the seller at various stages for e.g 

  • If buyers purchase goods/things on a wholesale basis.
  • If the buyer purchased goods on a cash basis
  • If the stock is of perishable nature then the seller tries to sell it at a low cost. So, Seller can offer it with a discounted price.
Moreover, the Discount is of nominal nature it means a discount is to be considered as expenses that would be chargeable under profit and loss account.

Types of Discount

1. Cash Discount
2. Trade Discount

Types of discount
Types of discount

Let's Understand about cash discount and trade discount

1. Cash Discount:- In simple terms, Cash Discount means to reduce the selling price by some percentage in case of buyer making a payment within the time period specified for eligibility of cash discount. Every supplier of goods or services wants early payment from the buyer. For this purpose, the seller offered a discount for making an early payment to the buyer. 

Moreover, If we say cash discount is basically giving to the buyer for motivating them to pay as early as possible for taking goods or services. then it would not be wrong. 
cash discount
Cash Discount

Further, we also have to know that seller will record as a sales discount in its account in the meanwhile buyer will record as purchase discount in their accounts.

Also further, We have to know that Cash discount is considered as nominal account.

Example of cash discount

Let Mr. Sushant Singh Rajput went to a shop(Shop name is Vehicle baba) to purchase an electric scooter. When he reached there, he saw many types of scooters and understood about specifications. 

Miss Rani helped him to understand specifications and their prices. One electric vehicle he most liked and asked the price of that vehicle. Miss Rani said it cost to you Rs.90000 with 1 year of warranty.

But Mr. Rajput was having only 81000 at that time. He said it is very costly for me. Can you provide me a discount on that price?

Miss Rani said Let me ask manager first. She went to the manager and asked him about a discount on behalf of Mr. Rajput.

The manager agree to give a 10% of discount to Mr. Rajput. Rajput was very happy with this price. He paid Rs.81000 and took that vehicle with him.

Calculation of discount

List Price               90000
Discount(10%)       (9000)
Net payable          81000

2. Trade Discount:-  Trade discount means a discount that is available to the buyer on the purchase of bulk quantity. Trade discount we are also known as the quantity discount.

In the present scenario, we can not fix a rigid selling price. The selling price is always to be flexible. If any organization is fixing a selling price which is not flexible or which is not changeable according to quantity purchased by the buyer, then the seller would not be able to survive in this competitive market.

Trade discount
Trade Discount

Moreover, A trade discount allows a company to fix the selling price according to the customer to customer.

Further, you also have to know that the trade discount would not be recorded in the accounts either by the buyer or seller.

Example of Trade Discount

Example 1
Mr. Ram dealing with a product that required 3 types of raw material. Mr. Ram purchasing all 3 raw materials from different -2 sellers. Material A, B, and C priced at Rs.100,200 and 250 respectively. Seller of Material offered to Mr. Ram is to buy all 3 types of material from them. For which they offered a special price amounting to Rs. 500 for all three materials. 

In this way, after the discount of Rs.50, Mr. Ram got this material for Rs.500. The rebate of 50 rupees received by Mr. Ram is called a trade discount.

Example 2
Ram & Shyam Co. place an order for 1000 quantity of material to AB & Co. For 1000 quantity price per unit was fixed of Rs.110 per unit. Later, AB & Co. offered to Ram & Shyam Co., If they purchase a consolidated quantity of 2000 units, it will cost Rs. 100 per unit.

Hence, we can calculate a trade discount as given below:

By accepting this offer Ram & Shyam Co. can save amounting to Rs.20000

2000*(110-100) = Rs.20000

They get a trade discount of Rs.20000, but this amount will not be recorded in the accounts.
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Written by - Pankaj Kumar

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