July 5, 2020

SB-Accounting

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Meaning of trade discount and detail explanation

Meaning of trade discount and detail explanation

Large businesses, especially manufacturing firms, give discounts to wholesalers and retailers. Also, retail businesses do give discounts and coupons to their customers. Discounts come in different forms. In this article, a trade discount is the main focus.

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Definition of trade discount

Trade discount is defined as a reduction in the selling price of goods or services to enable retailers to sell and earn a profit.

It is also referred to as an allowance off selling price for bulk purchases.

Key points to note

Trade discount is a reduction or allowance in the selling price of goods and services. This allowance usually comes in the form of a percentage. A firm may give an allowance of 5 percent off the selling price of its product.

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Trade discount is mostly given to encourage bulk purchases. Businesses may give trade discounts when a customer or client is willing to buy in large quantities. A business may have a policy giving a 2% trade discount when a sale is more than 1000 units. And a 5% trade discount when the sale is above 5000 units.

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Another reason for the given trade discount is to encourage bulk buying by customers. A business may have the policy of selling goods to customers at a trade discount if the quality of goods is with a particular limit.

For example, AB and co have the policy of selling goods to its customers as follows:

Meaning of trade discount and detail explanation

If Eloho bought 3,000 units @40 Naira of goods from AB and co, the discount given shall be the amount expected to be paid multiply by the trade discount.

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The amount expected to be paid by Eloho shall be 3000 units × 40 Naira. That is 12,000 Naira.

The trade discount is 12,000 × 2 ÷ 100 which gives 2,400 Naira.

Therefore the trade discount given to Eloho is 2,400 Naira.

Trade discount is most times given to retailers to enable them to earn profits. The profit is therefore the trade discount given after deducting operating expenses.

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Conclusion

Trade discounts are allowances off the selling price of goods and services. Companies that are more likely to give a reduction in prices for bulk purchases are manufacturing businesses.

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