**Trade Discount**

A trade discount is a reduction in the listed price of a product or service offered by the seller to the buyer. It is a common pricing strategy used in business-to-business transactions. Trade discounts are primarily used to incentivize bulk purchases, build customer loyalty, encourage repeat business, and foster long-term relationships with trade partners.

**Purpose of Trade Discount**

The purpose of offering trade discounts is to provide an incentive for buyers to purchase larger quantities of goods or services. By offering a lower price for bulk purchases, sellers can increase their sales volume and improve their market share. Trade discounts are particularly prevalent in industries such as manufacturing, wholesale, and distribution, where large quantities of goods are bought and sold.

**Calculation of Trade Discount**

The trade discount is usually expressed as a percentage off the list price. To calculate the trade discount, the list price is multiplied by the trade discount rate. For example, if a product has a list price of $100 and the trade discount rate is 20%, the trade discount would be $20. Therefore, the buyer would pay the discounted price of $80.

**Cash Discount**

A cash discount is a reduction in price offered by the seller to the buyer for paying the invoice within a specified period. Unlike trade discounts, which are based on the quantity purchased, cash discounts are based on the timing of payment. Cash discounts serve as an incentive to encourage early payment and improve the seller's cash flow.

**Purpose of Cash Discount**

The purpose of offering cash discounts is to motivate customers to pay their invoices promptly. By offering a discount for early payment, sellers can ensure a steady inflow of cash, reduce their accounts receivable period, and minimize the risk of bad debts. Cash discounts are commonly used in industries where payment terms are typically extended, such as wholesale, manufacturing, and distribution.

**Calculation of Cash Discount**

Cash discounts are typically expressed as a percentage off the invoice amount. The discount percentage is based on the terms of payment agreed upon between the buyer and the seller. For example, if the terms are "2/10, net 30," it means that the buyer can deduct 2% from the invoice amount if payment is made within 10 days. If the invoice amount is $1,000, the cash discount would be $20. Therefore, the buyer would pay $980 if the invoice is settled within the discount period.

In summary, trade discounts are reductions in the listed price offered to buyers based on the quantity purchased, while cash discounts are offered for early payment of invoices. Both types of discounts serve different purposes and are commonly used in business-to-business transactions to incentivize buyers, increase sales, and improve cash flow for sellers.

A discount given by the seller to the buyer as a deduction in the list price of the commodity is trade discount A deduction in the amount of invoice allowed by the seller to the buyer in return for immediate payment is cash discount