A cash discount also called as early payment discount, is a deduction allowed by some sellers of goods or by some providers of services in order to motivate customers to pay within a specified time.
It is known as a sales discount from the perspective of the company selling the goods and purchase discount from the perspective of the buyer purchasing the goods.
The amount of the cash discount is usually a percentage of the total amount of the invoice, but it is sometimes stated as a fixed amount & is shown as an expense in the income statement (profit and loss account).
EXAMPLE OF CASH DISCOUNT :-
Let’s say that 100 Fans are sold for the invoice price of 300 each and the payment terms are 1/10, Net 30 days.
It means that the buyer will get a 1% cash benefit from the total invoice price if the payment is made within the first 10 days of receipt of the invoice. (Assuming there is no trade discount)
|Amount due as per Invoice||30,000|
|Less Cash Discount 1%||300|
|Cash to be paid within 10 days||29,700|
The buyer has a choice to not avail the discount. In this case, the total amount due will be Rs 30,000 which can be paid within 30 days.
- A cash discount is beneficial to the supplier as it allows him to have access to cash much sooner and therefore ensure liquidity to the business.
- It reduces the chances of the bad debts that might arise in the future due to non-payment of dues by the customers of the company.
- New customers will get attracted by cash discounts , thereby it helps in boosting the sales of the firm.
- It will lead to a reduction in the sales value or turnover of the business & may result in discouraging the investors.
- Giving cash discounts may also result in reducing the profit margin of the firm.
Thus, in simple words, a cash discount can be termed as an incentive that a seller offers to a buyer in return for paying a bill owed before the scheduled due date.