What is a Trade Discount?
A trade discount is a reduction in the price of a good or service that is offered to a reseller who purchases in bulk. Trade discounts are a common marketing tool to encourage larger purchases, and are often offered in addition to other discounts, such as volume discounts. Trade discounts can also be used to help a reseller sell goods at a lower price than the competition.
There are two types of trade discounts:
- The first is based on the invoice value of the purchase and is typically given as a percentage of the invoice price. For example, a 5% trade discount on an invoice totaling $1,000 would result in a $50 reduction in the price of the goods.
- The second type of trade discount is based on the list price of the goods and is typically given as a fixed dollar amount. For example, a $100 trade discount on a purchase of $1,000 worth of goods would result in a final price of $900.
Trade discounts are typically offered to resellers who purchase large quantities of goods from a supplier. The size of the discount is usually based on the volume of the purchase, with larger purchases resulting in bigger discounts.
Description of Trade Discount
A trade discount is a reduction in the retail price of a product, typically given to trade customers such as retailers or wholesalers to increase sales.
The trade discount amount is typically calculated as a percentage of the retail price. For example, if a trade customer is given a 10% trade discount, they will only pay 90% of the published retail price for the product.
Trade discounts are often offered in bulk quantities or when customers offer early payment discounts. Discount percentages can also be used to encourage customer loyalty and increase sales.
Net price is the trade discount price after all trade discounts have been applied. The net price is the price that trade customers pay for goods purchased. Suggested retail price (SRP) is the manufacturer’s recommended selling price of a product.
SRP does not include trade discounts or any other discounts that may be available to trade customers. List prices are the prices that trade customers pay for goods before any trade discounts are applied. List prices are often used as a starting point for negotiation and can be negotiable.
Increasing sales is the main goal of offering trade discounts. By offering trade discounts, businesses can increase sales by encouraging customers to purchase more products. Trade discounts can also be used to encourage customer loyalty and repeat business.
Accounting for a Trade Discount
Trade discounts are typically recorded in the accounts receivable module of a company’s accounting system. When a trade discount is taken, the invoice price of the goods is reduced by the amount of the discount, and this is the amount that is recorded in the accounts receivable system.
For example, if a company sells $1,000 worth of goods to a customer and extends a 5% trade discount, the invoice price of the goods will be reduced to $950. This is the amount that will be recorded in the accounts receivable system.
Trade discounts can also be recorded in the accounting system as sales discounts. A sales discount is a reduction in the price of a good or service that is offered to a customer who pays for the purchase within a certain period. Sales discounts are typically given for early payment and are often tiered, with larger purchases getting a bigger discount than smaller purchases.
For example, if a company sells $1,000 worth of goods to a customer and offers a 2% sales discount for payment within 30 days, the customer would receive a $20 discount if they paid for the purchase within 30 days. This $20 discount would be recorded as a sales discount in the accounting system.
Example of a Trade Discount
ABC Co. sells widgets to XYZ Corp. ABC Co. offers a trade discount of 10% to XYZ Corp. on all purchases of $5,000 or more.
XYZ Corp. places an order with ABC Co. for $6,000 worth of widgets. ABC Co. applies a 10% trade discount to the invoice, reducing the price of the widgets to $5,400.
Trade discounts are common in industries where resellers purchase large quantities of goods from suppliers. Trade discounts can also be tiered, with larger purchases getting a bigger discount than smaller purchases.
Differences Between Trade Discounts vs. Cash Discounts
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. |
Formula
The Trade Discount formula is calculated by multiplying the original list price by the trade discount rate and dividing by 100.
Trade Discount = (Original List Price x Trade Discount Rate) ÷ 100
For example, if a company has a list price of $100 for a good and offers a 10% trade discount, the Trade Discount would be calculated as follows:
Trade Discount = (100 x 10) ÷ 100
Trade Discount = $10
Thus, the invoice price of the good would be reduced to $90 ($100 – $10).
Benefits
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: Trade discounts are typically offered to resellers who purchase large quantities of goods from a supplier. The discount is generally calculated on the volume of the transaction, with greater purchases resulting in larger discounts. Trade discounts can help resellers save money on large purchases by reducing the overall cost of the goods.
- Helps suppliers increase sales: Trade discounts can help suppliers increase sales by making it more affordable for resellers to purchase their goods. Trade discounts can also help to increase sales by motivating resellers to purchase larger quantities of goods, which can result in higher profits for the supplier.
- Trade discounts are typically recorded in the accounts receivable module of a company’s accounting system: Trade discounts are typically recorded in the accounts receivable module of a company’s accounting system. This allows companies to track the discounts that have been given to resellers and to ensure that the appropriate discounts are applied to future invoices.
- The size of the trade discount is usually based on the volume of the purchase: The size of the trade discount is usually based on the volume of the purchase, with larger purchases resulting in bigger discounts. Trade discounts can help to encourage resellers to purchase larger quantities of goods, which can help to increase profits for the supplier.
- Trade discounts can also be tiered: Trade discounts can also be tiered, with larger purchases getting a bigger discount than smaller purchases. This can help to encourage resellers to purchase larger quantities of goods, which can help to increase profits for the supplier. Trade discounts can also help to ensure that resellers are getting the best possible price for the goods they purchase.
Drawbacks
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 compare prices between different suppliers. This is because each supplier may offer different trade discounts for the same goods. Trade discounts can also make it difficult to compare prices between different resellers. This is because each reseller may offer different trade discounts for the same goods.
- Trade discounts can make it difficult to determine the true cost of goods: Trade discounts can make it difficult to determine the true cost of goods. This is because the trade discount rate is typically calculated after the list price of the goods has been determined. Trade discounts can also make it difficult to compare prices between different suppliers. This is because each supplier may offer different trade discounts for the same goods.
- Trade discounts can sometimes be difficult to track and manage: Trade discounts can sometimes be difficult to track and manage, as they are typically recorded in the accounts receivable module of a company’s accounting system. This can require extra effort from accounting staff, as they must ensure that the appropriate discounts are applied to future invoices. Trade discounts can also be tiered, which can make tracking and managing them even more difficult.
- Trade discounts may also result in lower profit margins for suppliers: Trade discounts may also result in lower profit margins for suppliers, as they are typically offered to resellers who purchase large quantities of goods. Trade discounts can also help to increase sales by making it more affordable for resellers to purchase goods, which can result in higher profits for the supplier. However, the size of the trade discount is usually based on the volume of the purchase, which can eat into supplier profits. As trade discounts can also be tiered, with larger purchases getting a bigger discount than smaller purchases. This can further reduce supplier profits.
Conclusion!
Trade discount is an important concept in the world of business. It is a way for companies to offer discounts to their customers, and it can be a very effective way of doing business. Trade discounts can be a great way to save money on the products you purchase, and it is also a way to build relationships with your suppliers.
Trade discounts can also help you to get a better price on the products you purchase. If you are looking for a way to save money on the products you purchase, a trade discount may be a good option for you.
What do you think? Is a trade discount a good way to save money on the products you purchase? Let us know in the comments below.
