What is Discount ? Meaning and Types of Discounts Cash Trade

What is Discount ? Meaning

In simple terms, Discount is an allowance or concession in price. Discount is given so that the buyer is induced (lured) to place an order and later to make payment in time.

Discount can be also referred to as a deduction in price. The seller deducts the discount from the gross or total price, and the buyer is supposed to pay the net amount.

Types of Discounts

The two kinds or types of discounts are :-

1. Cash Discount
2. Trade Discount

1. Cash Discount

Cash discount is an allowance or concession given by the seller to the buyer. This discount is offered to encourage the buyer for quick payment or settlement. It is allowed for immediate payment of cash or payment within a short period.

The cash discount is normally shown in the quotation and invoice. It is deductible from the total price and the buyer is requested to pay only to the net amount. Cash Discount is usually stated in the percentage form.

2. Trade Discount

Trade Discount is a reduction in the catalogue price of the goods allowed only if the quantity ordered by the buyer is quite large. Its purpose is to encourage the buyer to make bulk purchases. It is allowed on cash as well as credit sales.

The trade discount is not shown in the books of account. The trade discount is calculated as some percentage of the catalogue price. It varies according to the quantity of order.