What is a Trade Discount?
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 the concerned consumer to increase the sales of the business as more customers are attracted when the discount is given on the list price of the product.
In simple words, a Trade discount is a discount which is referred to as, discount given by the seller to the buyer at the time of purchase of goods. It is given as a deduction in the list price or retail price of the quantity sold. This discount is usually allowed by the sellers to attract more customers and receive the order in bulk, i.e., to increase the number of sales. Thus, no record is to be maintained in the books of accounts of both the buyer and seller.
- It is a discount allowed on a product as a reduction to the retail price. It is the amount by which a manufacturer or wholesaler reduces the price of a product when it sells the product to a reseller.
- Trade discount usually varies with the quantity of the product purchased. It is a reduction in the published price of the product.
- For example, a high-volume wholesaler might be entitled to a higher discount compared to a medium or low-volume wholesaler.
- Usually, a retail customer will not receive any discount and will have to pay the entire published price.
Accounting Treatment
The sale and purchase will be recorded at the amount after the trade discount is subtracted. As this discount is deducted before any exchange takes place, it does not form part of the accounting transaction and is not entered into the accounting records of the business.
Key Points
- It is usually allowed to facilitate bulk sales.
- It can be generally allowed for all customers who want to purchase in bulk.
- In the case of Trade discount, there is no entry made in the books of accounts of the buyer and seller.
- It is always deducted before any type of exchange takes place. Hence, it does not form part of the books of accounts of the business.
- It is usually allowed at the time of purchase.
- It usually differs from the number of goods purchased and the number of purchases.
Head to Head Differences Between Trade Discount vs. Cash Discount
| Basis For Comparison | Trade Discount | Cash Discount |
| Meaning | A discount given by a seller to the buyer as a deduction in the list price of the commodity is a trade discount. | A reduction in the amount of invoice allowed by the seller to the buyer in return for immediate payment is a cash discount. |
| Purpose | To facilitate sales in bulk quantity. | To facilitate prompt payment. |
| When allowed? | At the time of purchase; | At the time of payment; |
| Entry In Books | No | Yes |
Trade Discount vs. Cash Discount Journal Entry
Mr. X purchased goods from Mr. Y of list price $8000, on April 1st, 2018. Mr. Y allowed a 10% discount to Mr.X on the list price for purchasing goods in bulk quantity. Further, a discount of $500 was allowed to him for making an immediate payment.
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- Firstly, the discount allowed on the list price of the goods, i.e., 10% of $8000 = Rs. 800 is a trade discount, which will not be recorded in the books of accounts.
- Next, the discount received by Mr.X of $500 for making the immediate payment is a cash discount, and it is allowed on the invoice price of the goods. The cash discount is to be recorded in the books of accounts.
The journal entry in the books of Mr.X is:
Trade discount is given on the list price or retail price of the goods.
Conclusion
The final objective of every organization is to increase sales revenue, and the trade discount is the primary tool to achieve it. A cash discount is also a tool used to achieve the objectives of the organization. Usually, the customers have the habit of bargaining, and by giving them these discounts, it enables a firm to achieve its objectives and retain the customer. Thus, it will be a favorable situation for both the customer and the organization.
As we discussed above, it increases the purchase quantities. It also increases the credit risk of the organization. It does not affect the profit margin of the organization as it is not recorded in the books of accounts, but more and more cash discounts decrease the firm’s profit margin. Hence, both the discounts have their advantages and certain disadvantages that need to be taken care of while giving discounts.
Trade Discount Video
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