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Trade Discount vs Cash Discount

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Trade Discount:
- A trade discount is a reduction in the list price of goods that a manufacturer offers to a retailer or wholesaler.
- It is used to encourage bulk purchases or to reward customer loyalty.
- The trade discount is usually expressed as a percentage off the list price and is given before the purchase is made.
- It is not shown separately on the invoice but is included in the calculation of the net amount owed by the buyer.

Cash Discount:
- A cash discount is a reduction in the purchase price that a seller offers to a buyer for paying the invoice within a specified time period.
- It is also known as a prompt payment discount and is used to incentivize early payment.
- The cash discount is typically expressed as a percentage of the total invoice amount and is shown as a separate line item on the invoice.
- The terms of the cash discount, such as the percentage and the time period for payment, are agreed upon by the seller and the buyer at the time of the sale.

Differences:
- Nature: Trade discount is given before the purchase is made, while cash discount is given after the purchase is made.
- Purpose: Trade discount is used to encourage bulk purchases or reward customer loyalty, whereas cash discount is used to incentivize early payment.
- Calculation: Trade discount is calculated as a percentage off the list price, while cash discount is calculated as a percentage of the total invoice amount.
- Display: Trade discount is not shown separately on the invoice, while cash discount is shown as a separate line item on the invoice.

In conclusion, trade discounts and cash discounts serve different purposes in the pricing strategy of a business. Understanding the differences between the two can help both sellers and buyers make informed decisions during transactions.

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