Cash Discount

What is a Cash Discount?

Cash Discounts are the discounts or incentives given by the seller to the customer for paying dues on or before the due date as per the company’s terms and conditions.

Example of the Cash Discount

Let’s discuss an example of a cash discount.

Let’s take the example of a company named A ltd, which deals with mobile phones and related accessories. It allows cash discount and adopts the policy that if the buyer pays within ten days of the purchase date, the buyer will be given a discount @ 1% of the invoice value. Now suppose a customer purchases a mobile phone worth $500 on 16th April 2019 on a credit basis and is given 30 days credit period.

Now, if the customer discharges his dues till 25th April 2019, he has the liability to pay only $495 as 1% of $500, i.e., $5 is given as a discount for pre-payment of dues. If the customer pays later than ten days, then no cash discount will be provided and is liable to pay the full amount of $500 to the company.

Cash Discount

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Advantages of the Cash Discount

Disadvantages of the Cash Discount

Conclusion

From the point of view of the company, cash discounts save time, efforts and the money of the company which it might have to spend on the collection process for collecting the due amount from the customers on time and from the point of view of the customers it will save the money of the customer as he will get the discount for early payment. Although the cash discounts given to the customers can improve the cash flow of the business along with reducing its bad debts, at the same time, it might lead to a reduction in the profit margin of the seller unnecessarily.

This has been a guide to what is cash discount and its meaning. Here we discuss the practical example of a cash discount with advantages and disadvantages. You can learn more from the following articles –

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