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Naina@123
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In: 1. Financial Accounting > Miscellaneous

What is the difference between cash discount & trade discount?

What is the difference between cash discount & trade discount?
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    1 Answer

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    1. prashant06 B.com, CMA pursuing
      2021-08-18T16:41:47+00:00Added an answer on August 18, 2021 at 4:41 pm

      A cash discount is a discount allowed to customers when they make payments for the items they purchased. This type of discount is generally based on time. The early the payment is made by the debtors, the more discount they earn. To be more precise cash discount is given to simulate or encourage early payment by the debtors.

      Trade discount is a discount allowed by traders on the list price of the goods to the customer at specified rate. Unlike cash discount, trade discount is based on number of sale i.e, more the sale more the discount earned. This is mainly given on bulk orders by the customers.

      To understand trade discount and cash discount let me give you simple example

      Mr. X purchased goods from Mr. Y of list price Rs 10,000. Mr. Y allowed a 10% discount to Mr.X on the list price for purchasing goods in bulk quantity. Further, he was provided with cash discount of Rs 500 for making an immediate payment. Therefore the entry for the above transaction in the books of Mr. X would be

      Purchase A/c                                                        ……Dr 9,000
                 To Cash A/c 8,500
                 To Discount received 500
      (Being goods purchased from Mr. Y worth Rs. 10,[email protected] 10% trade discount and cash discount of Rs. 500)
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