Trade Discount Vs Cash Discount

Trade Discount

Trade Discount is the amount that the seller reduces the selling price for any specific customer due to status or sale volume. The manufacturing will provide a trade discount to the whole seller who makes a bulk purchase as they will resell the product to the end-user. It allows the wholesaler to earn some profit from reselling the product to consumers. The seller also provides discounts during the promotional period for their new product. It will help to introduce the product to the market and allow the company to initiate the sale.

Trade discounts can be made in dollar amounts or percentages of the selling price. The actual selling price equal to the normal price deducts the discount dollar amount. If the discount is provided as the percentage, we need to calculate it by multiplying it with the normal price.

It is the discount provided by seller at the time of selling. It is not recorded as an expense in the income statement. We record the revenue only the net amount which equals to gross price less discounted amount.

Trade Discount Journal Entry

Trade discount is provided before the seller records revenue and accounts receivable, so it does not impact the accounting transaction. We simply record revenue and accounts receivable for the net amount. The discounted amount will not show in the recording.

Accounts Debit Credit
Accounts Receivable 000
Sale 000

Trade Discount Example

Company ABC manufactures the cloth and sells it to both the whole seller and consumers. The company provides a trade discount of 20% to the wholesaler who purchases more than 1,000 units per order. During January, one wholesaler order 5,000 units of cloth at $5 per unit. Please calculate the trade discount and make journal entries.

Trade Discount = 20% * (5,000 units * $ 5) = $ 5,000

Net sale = ($ 5 * 5,000 units) – $ 5,000 = $ 20,000

Journal entry:

Accounts Debit Credit
Accounts Receivable 20,000
Sale 20,000

Cash Discount

Cash discount is the amount deducted by the seller when the buyer makes payment within the credit term. It is also known as the early payment discount. The seller will deduct the amount of buyer owe if they agree to pay before the specific time.

The discounted percentage and credit term state on the selling invoice. It also can be the dollar amount but less popular. The format of cash discount usually as the following:

2% 10 / Net 30

It means the company will provide a cash discount of 2% over the invoice amount if the customer pays within 10 days from the invoice date. The credit term is 30 days after the invoice date.

[Percentage discount][If paid within] ÷ Net [normal number of payment days]

Cash Discount Journal Entry

Cash discount will have an impact on journal entries of the company when the customer eligible for the discount. The cash discount will become the expense of the company as it will reduce the accounts receivable previously record.

Accounts Debit Credit
Cash Discount 000
Cash 000
Accounts Receivable 000

Cash Discount Example

Company ABC sells goods for $ 50,000 to the customer on credit. In order to encourage customer payment, the company offers a term payment of 5% 10/Net 30. It will provide 5% cash discount on early payment within 10 days. The customer paid the full amount after 5 days to enjoy the cash discount. Please calculate the cash discount and prepare a journal entry.

Cash discount = $ 50,000 * 5% = $ 2,500

The customer need to pay only $ 47,500 ($ 50,000 – $ 2,500).

Accounts Debit Credit
Cash 47,500
Cash Discount 2,500
Accounts Receivable 50,000

Difference Between Trade Discount and Cash Discount

Trade Discount Cash Discount
Discount provided by the seller at the time of purchase. Discount provide by seller when customer make payment within a specific period.
It used to increase sales. It uses to encourage early payment.
The discount shown on the invoice is the deductible amount. The discount does not show on the invoice. It shows only the credit term.
It is provided at the time of purchase. It is given at the time of settlement.
It does not have an impact on the journal entry. The seller needs to record it as an expense in income statement.