What is Discount?

A discount is a reduction in the price of goods or services offered by a seller to a buyer. Businesses use discounts to increase sales, attract customers, and encourage quick payments.

There are mainly two types of discounts:

Trade Discount
Cash Discount
Trade Discount
Definition

A Trade Discount is a reduction given on the list price (MRP) of goods at the time of purchase.

It is usually offered:

To wholesalers
Retailers
Regular customers
Bulk buyers

Trade discount is given before preparing the invoice.

Example of Trade Discount

Suppose:

Product Price = ₹10,000
Trade Discount = 20%
Calculation

10000×
100
20
​

=2000

Final Selling Price:

10000−2000=8000

So, the customer pays ₹8,000.

Features of Trade Discount
Given at the time of sale
Encourages bulk purchases
Not recorded separately in accounting books
Calculated on MRP/List Price
Helps increase sales volume
Cash Discount
Definition

A Cash Discount is a discount given to customers for making quick or immediate payment.

It is offered after the sale is completed.

Example of Cash Discount

Suppose:

Invoice Amount = ₹8,000
Cash Discount = 5%
Calculation

8000×
100
5
​

=400

Final Amount Paid:

8000−400=7600

Customer pays ₹7,600 if payment is made on time.

Difference Between Trade Discount and Cash Discount
Basis Trade Discount Cash Discount
Given On List Price Invoice Amount
Purpose Increase Sales Encourage Fast Payment
Given When At Purchase Time At Payment Time
Accounting Entry Not Recorded Separately Recorded in Books
Customer Benefit Lower Purchase Price Savings on Early Payment
Mostly Used For Dealers & Wholesalers Credit Customers
Journal Entry Example
Trade Discount Entry

If goods worth ₹10,000 sold with 20% trade discount:

Only net amount is recorded:

Sales A/c Dr. ₹8,000
To Customer A/c ₹8,000
Cash Discount Entry

If customer pays early and receives ₹400 cash discount:

Cash A/c Dr. ₹7,600
Discount A/c Dr. ₹400
To Customer A/c ₹8,000
Real Business Example

A wholesaler gives:

15% Trade Discount to retailers
2% Cash Discount for payment within 7 days

This helps:

Increase sales
Improve cash flow
Build customer loyalty
Conclusion
Trade Discount helps increase product sales.
Cash Discount helps businesses receive payments faster.
Both discounts are important in accounting and business management.

Businesses using billing software like Marg ERP can easily manage both discount types automatically.

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business accounting tutorial

“Trade Discount vs Cash Discount Explained Simply”
“Most Students Confuse These Two Discounts!”
“Accounting Discount Formula Made Easy”
“Trade vs Cash Discount – Full Comparison”
“Learn Discount Accounting in 5 Minutes”