It is a rebate or an allowance from the invoice price allowed’ by the seller when payment is made in cash immediately after or within a reasonable time length from the date of presentation of the bill. It is a reduction in the price paid for a product or service if you pay with cash immediately or within a certain specified period of time. It 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. A cash discount is also known as an early payment discount.
The sellers and providers offering a cash discount will refer to it as a sales discount, while the buyer will refer to the same discount as a purchase discount. This discount is given in exchange for the buyer paying the invoice earlier than its normal payment date. For example: If an invoice is due in 30 days, a seller could offer the buyer a typical cash discount of 2 (Product) if they were to pay the invoice within the first 10 days of receiving it.
Calculation = Price Paid = Invoice Price – (Cash Discount x Invoice Price)
- Cash discounts are offered to encourage buyers to pay for the goods or services before the due date specified on the invoice.
- They are usually called purchase discounts from the buyer’s perspective and sales discounts from the seller’s perspective.
- They are incentives offered to buyers that reduce the amount owed to the seller by either a fixed amount or a percentage of the total bill.
- It is an incentive offered by a seller to a buyer for paying an invoice ahead of the scheduled due date.
An example of how a cash discount is applied:
- Net price of goods: $200.00
- VAT Calculation:
- Goods $200.00
- Less 10% cash discount ($20.00)
- Goods after cash discount $180.00
- VAT @ 20% of $180.00 = $36.00
- Gross Invoice total of $216.00.