What is difference between trade discount and cash discount? Explain in easy language?

Question

Answer

Trade discount is not recorded but cash discount is recorded in books of account . td is given at the same time of
payment or before but cd is given at the time of payment.

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Thanku

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Trade discount is that discount that is given to every customer of the firm it doesn't matter that customer pay in cash or purchase on credit. But cash discount is given to only that customer who pay in cash.

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Trade discount is not recorded in the books of accounts whereas cash discount is recorded in the books of account in both cases whether received or given

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This is a difference regarding the place from where the discount is deducted. The trade discount is deducted from the value on the invoice having the listed price of the goods purchased. However, a cash discount is not deducted from the value of the goods on the invoice.

Answer

Trade Discount:
A trade discount is a reduction in the price of goods or services provided by a supplier to its customers, typically based on the quantity or value of the goods purchased. It is an incentive given by the supplier to the customer to promote sales and encourage repeat business. Trade discounts are often negotiated between the supplier and the customer and are not usually mentioned on the invoice or receipt.

Cash Discount:
A cash discount, also known as a prompt payment discount, is a reduction in the price of goods or services offered by a supplier to its customers for making payment within a specified time frame. It is a discount given to the customer as an incentive for early payment, typically within a certain number of days from the date of invoice. Cash discounts are usually mentioned on the invoice or receipt.

Differences between Trade Discount and Cash Discount:

1. Objective:
- Trade discounts are offered to encourage customer loyalty, promote sales, and maintain good relations with the customer.
- Cash discounts are offered to incentivize prompt payment and improve cash flow for the supplier.

2. Timing:
- Trade discounts are determined before the sale takes place and are often negotiated based on factors such as the volume of purchase or the customer's status.
- Cash discounts are applied after the sale has taken place and are typically based on the payment being made within a specified time frame.

3. Visibility:
- Trade discounts are not usually mentioned on the invoice or receipt. Instead, they are reflected in the net price charged to the customer.
- Cash discounts are clearly stated on the invoice or receipt, indicating the discount percentage and the time frame within which the payment must be made to avail the discount.

4. Calculation:
- Trade discounts are calculated based on the agreed percentage or value provided by the supplier. The discount is applied to the list price of the goods.
- Cash discounts are calculated based on the invoice amount. The discount is subtracted from the total amount due if the payment is made within the specified time frame.

5. Effect on Financial Statements:
- Trade discounts do not affect the financial statements directly as they are not recorded. They are considered a reduction in revenue or cost of goods sold.
- Cash discounts, when availed by the customer, result in a reduction of accounts receivable for the supplier and may impact the income statement and balance sheet.

In conclusion, trade discounts are offered before the sale to promote sales and customer loyalty, while cash discounts are provided after the sale to incentivize prompt payment. Trade discounts are not visible on invoices, whereas cash discounts are clearly stated. The calculation and impact on financial statements also differ between the two types of discounts.

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Trade discount is a discount which is given or allowed to all the person who purchases something cash discount is a discount which is given to person who purchases something on cash or cheque

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