3 types of discounts are offered in any business, trade, and sales. Also, there are the same in accounting terms.
As per prevailing practice or terms of purchase and sale, a certain amount of money determined at a fixed rate and deducted from invoice price or amount receivable is called the discount.
There are 3 Types of Discount;
- Trade discount,
- Quantity discount, and
- Cash discount.
These are explained below;
The amount which is deducted from the price list of the goods sold is called a trade discount. The seller fixes up invoice price or sale price deducting trade discount from the listed price. The trade discount is not accounted for.
The discount allowed by the seller to the buyer on the amount crossing minimum target sales is called quantity discount
I.E. after granting a normal trade discount if the sale amount crosses the minimum target sale, the seller grants an excess discount to the buyer.
This excess amount of discount is called a quantity discount. It is included in the cash discount which is shown on the challan/invoice.
The seller grants some amount as a discount to the debtor for the realization of the outstanding sales within the term period of sales. This is called a cash discount.
The discount is a nominal account. The discount expense and discount income are recorded on the debit side and credit side of the treble column cash book respectively.
Differences between Trade Discount and Cash Discount
|Trade Discount||Cash Discount|
|The amount, for which the listed price of the goods sold is reduced, trades discount.||The amount deducted from invoice price for realizing outstanding sales amount is a cash discount.|
|Generally, trade discount is granted to bulk buyers.||A cash discount is allowed to buyers if they pay the price of goods within the term- period.|
|Trade discount is computed on catalog prices.||A cash discount is computed on invoice price.|
|Trade discount arises out of trading.||Cash discount arises out in settlement of debts.|
|Trade discount creates opportunities for the buyer in earning the reasonable profit even trading goods on invoice price.||Cash discount inspires buyers settling debts in time.|
|Trade discount is not accounted for in either of seller or purchaser.||A cash discount is accounted for in the books of account of both buyer and seller.|