Finance

# Cash Discount

Cash Discount

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)

Characteristics

• 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.