Trade discount

At the time of selling goods to customer the seller allows a discount (concession). It is allowed at a certain percentage of the listed price. For example the listed price of the goods is Rs.30,000 and seller allows a discount of 10% on the listed price to customer. It means the net price of the goods is Rs.27,000 (30,000-3,000).Both buyer and seller will record Rs.27,000 (not Rs.30,000) in their books of accounts. In other words trade discount is not recorded in the books of accounts. Trade discount is given by the seller to his regular customers or the customers who purchased in a bulk quantity.

Cash discount

It is discount or allowance given by a creditor to a debtor if the amount due is paid by the debtor before the due date. It is reduction in price offered by seller (creditor) to encourage customers (debtors) to pay their debts within the specified period. For example x sold goods to y (a customer) for Rs.1,000 on credit basis. It means x is creditor and y is debtor X offers discount of 2% to y if y pays the price within 15 days. Y will pay only Rs.980 (1,000-20) to x if pays within the 15 days. Such discount is known as cash discount and is recorded in the books of accounts.