Bulk purchases made by resellers come with a perk–the trade discount! So those of you who want to buy in bulk or meet certain conditions can get a grant from the original list price of the product in the form of trade discount.
Such a discount takes place when the cost of goods or services is reduced at the time of purchase of large quantities of goods, providing benefits to those who shop in bulk. Businesses offer trade discounts to not only reduce their inventory costs but also motivate customers to make more purchases.
What is a Trade Discount?
Purchasing in bulk offers resellers the opportunity to receive a trade discount from suppliers. The more goods purchased, the bigger the percentage of the price break; therefore, larger orders result in greater financial savings for those making wholesale purchases.
Trade discount is commonplace in the business world, as they allow companies to vary the price of their products according to each customer’s individual volume or stature. By utilizing these reductions from a company or manufacturer’s set cost, everyone can benefit from an advantageous deal!
Definition of Trade Discount
A trade discount is an agreed-upon reduction on the full price of selling a product or service between wholesalers and retailers or traders. This type of discount helps to ensure profit for all parties involved in the transaction.
Trade discounts are an excellent method of reducing expenditures, but it’s essential to guarantee that the quality is on par with your expectations. If you’re uncertain, simply inquire from the supplier for further details before placing a purchase order. This ensures that what you receive will meet all your standards and the net price will be worth every penny!
You can understand what is trade discount with more clarity with the help simple example given below –
Example of Trade Discount
If you’re the proud owner of a store and wish to purchase items from your supplier, you’ll be pleased to know that they offer an excellent trade discount percentage of 10%!
That means for every item bought, you only have to pay 90% of its original cost.
Key Points
Bulk sales are typically allowed and encouraged for a trade discount.
- All customers who are interested in purchasing bulk quantities can be accommodated with ease.
- Trade discount does not necessitate an entry in either the buyer’s or seller’s books of accounts.
- Prior to any transaction, the amount is always taken out. Therefore, it will not be accounted for on business ledgers.
- You’re generally given permission to purchase at the time of checkout.
- The amount of goods purchased and acquired frequently varies.
Accounting for a Trade Discount
The seller would not log the trade discount in its accounting records, but only record revenue corresponding to the amount invoiced for the customer.
Noting both the retail price and a trade discount on an invoice to a reseller would cause an inflated gross sales amount in the income statement. If left unaddressed, readers of financial statements could mistakenly assume that there is higher sales volume than what actually exists, overlooking any deduction from the trade discount.
Differences Between a Trade Discount and Cash Discount
Trade discount is provided to persuade buyers to make larger orders, while cash discounts are early payment discounts that act as an incentive for them to pay promptly. A trade discount is typically a certain percentage of the suggested retail price, while cash discounts possess fixed amounts.
Let us have a look at both on different grounds
| Trade Discounts | Cash Discount |
|---|---|
| Trade discounts are based on the invoice value of the purchase and are typically given as a percentage of the invoice price. | Cash discounts are based on the list price of the goods and are typically given as a fixed dollar amount. |
| Trade discounts are offered to resellers who purchase large quantities of goods from a supplier. | Cash discounts are offered to customers who pay for their purchase within a certain period of time. |
| Trade discounts are typically recorded in the accounts receivable module of a company's accounting system. | Cash discounts are typically recorded in the accounting system as sales discounts. |
| The size of the trade discount is usually based on the volume of the purchase, with larger purchases resulting in bigger discounts. | The size of the cash discount is usually based on the list price of the goods, with larger purchases resulting in bigger discounts. |
| Trade discounts can also be tiered, with larger purchases getting a bigger discount than smaller purchases. | Cash discounts can also be tiered, with larger purchases getting a bigger discount than smaller purchases. |
Pros
Trade discounts can help resellers save money on large purchases, and can also help suppliers increase sales by offering discounts to resellers. The five notable benefits of trade discounts are as follows-
- Enables resellers to save money on large purchases
- Helps suppliers increase sales
- Trade discounts are typically recorded in the accounts receivable module of a company’s accounting system
- The size of the trade discount is usually based on the volume of the purchase
- Trade discounts can also be tiered
Cons
Some of the negatives of trade discounts to take into consideration are as follows-
- It can make it difficult to compare prices
- Trade discounts can make it difficult to determine the true cost of goods
- Trade discounts can sometimes be difficult to track and manage
- Trade discounts may also result in lower profit margins for suppliers
Conclusion!
As a way to generate more sales and encourage customers, trade discounts are offered on the list price. This means that any purchases will be based upon the net price (list minus discount). It is important to note that trade discount is not recorded in books of account.
If you’re searching for a way to save money on the items you buy, then consider taking advantage of trade discounts – it’s an economical solution that could help cut costs!
Is a trade discount the right way to save money on your purchases? We want to hear what you think – share your thoughts in the comments section!
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