Cash discount

Definition

A cash discount is a reduction in the invoice price offered to buyers as an incentive for early payment. It encourages prompt payment and improves cash flow for the seller.

5 Must Know Facts For Your Next Test

1. Cash discounts are typically stated in terms such as '2/10, net 30,' meaning a 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.
2. Cash discounts are recorded as a reduction in revenue for the seller and an expense reduction for the buyer.
3. They differ from trade discounts which are reductions given at the point of sale rather than for prompt payment.
4. Accounting for cash discounts involves adjusting both accounts receivable and sales revenue on the seller's books.
5. These discounts can significantly impact a company's liquidity and financial statements.

Review Questions

Related terms

Trade Discount: A reduction in price given at the point of sale, not related to payment terms.

Accounts Receivable:

Amounts owed to a business by its customers from sales made on credit.

Sales Revenue:

The income received by a company from its sales of goods or services.