Difference Between Trade Discount and Cash Discount

Trade Discount vs Cash Discount Differences

The key difference between trade discount and cash discount is that trade discount refers to the reduction in list price known as discount, allowed by a supplier to the consumer while selling the product generally in bulk quantities to concerned consumer, whereas, cash discount is discount given by the supplier on its cash payments to recover the cash debts on time as it motivates the buyer to pay cash early as they are given discount if they pay within the stipulated time.

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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Source: Difference Between Trade Discount and Cash Discount (wallstreetmojo.com)

Example of Trade and Cash Discount

Consider a tractor maker XYZ and an ABC firm who buys the tractor from them with a 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 =$2,50,00,000
  • Trade discount = 10% = 10% * 2,50,00,000 = $25,00,000

The amount payable as per invoice = List price – discount

trade 1
  • = 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 payment in 30 days. In that case the calculations will be:

  • Amount payable as per invoice = $2,25,00,000
  • Cash discount = 3% = 3% * 2,25,00,000 = $6,75,000
trade 1.2
  • Amount payable (within 30 days) = 2,25,00,000 – 6,75,000
  • = $2,18,25,000

Please note that the calculation of trade discount happens before printing of 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

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Source: Difference Between Trade Discount and Cash Discount (wallstreetmojo.com)

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 inculcated in the listed prices of the products. It is in contrast to the cash discount, which is offered over and above the listed price.
  • Trade discount 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 make sure 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 both 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 inculcated 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 it. 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 with the timing of payments and installments. The aim is to get upfront payment instead of installments in the future. As a thumb rule – less the installments, more is the discount.
  • Trade discount is product specific and is not discriminated 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 taking delivery, preferably in cash.

Comparative Table

Basis of ComparisonTrade DiscountCash Discount
SourceIt is given by the seller to the buyer when he is buying goods as per the discount policy.This discount is given by the seller to the buyer when he is making a purchase transaction. Thus, it is not known beforehand but decided more on an ad-hoc basis.
AimIt is more like a way to retain business by incentivizing the buyer to buy products in large quantities and become a repeat customer.It is more like a negotiation tactic that incentivizes the buyer to make upfront payments.
Significance Given by the seller as a reduction in the market price of the product;Given by seller over and above the billed price to make immediate payments;
Timing Trade discount is executed when a buyer is initiating a buy order.A cash discount is executed when the buyer initiates payment.
Accounting Trade discount is not recorded as the amount payable is calculated after deducting the discount from the invoice itself.Recorded at the debit side on the cash bookCash BookThe Cash Book is the book that records all cash receipts and payments, including funds deposited in the bank and funds withdrawn from the bank according to the transaction date. All the transaction which is recorded in the cash book has the two sides i.e., debit and credit.read more

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 not only retain customers but also receive payments early, thereby reducing payment and credit risk.

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