October 19, 2020

SB-Accounting

Accounting + Finance Blog

Meaning of cash discount and key explanations

Meaning of cash discount and key explanations
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Discounts are general impetus businesses used to increase sales or reduce the risk of default. One important type of discount is a cash discount. In an article, I have shown how to calculate the cash discount. This article focuses on the definition and its explanation.

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Definition of cash discount

It is a type of discount given to customers to encourage prompt payments for goods bought or sold on credit.

Types of cash discount

Two types are known. Discount allowed and discount received.

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Discount allowed is a reduction in selling price and it is given to a customer by a business.

For example, when goods are sold to a customer on credit, it allows the customer cash discount if he or she pays for the goods within a specific time frame.

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Discount allowed is an expense to the business. And an income to the customer.

Discount received is a reduction in selling price and it is given by a supplier of goods or services to business.

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For example, the business may have purchased goods on credit from a supplier. To encourage the business to pay on time, the supplier will offer such to the business.

Discount received is an income to the business. And an expense to the supplier.

Key explanations

It is provided only when goods are sold on credit. If goods are sold for cash, there is no need for a cash discount. It is likely that other types of discount may have been given in a cash transaction. This discount includes coupons, trade and seasonal discounts.

It is given by a business to encourage prompt payment. To reduce default in repayment and other expenses involved to recover cash from goods sold on credit, a firm may issue a cash discount.

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The term may specify that if the customer pays within one month a discount of 10 per cent will be given. While any payment in the next two months might be 5 percent discounts.

A cash discount is an expense to the business. Unless, if the company is the one receiving the discount. This is true for discount received.

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Conclusion

To conclude, a cash discount helps to motivate customers to pay on time. However, it comes with a cost to the company. Such cost may be mitigated if the firm considers another cost that may be incurred if it is not given to the customer.

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