Trade discount

Definition

A trade discount is a reduction in the listed price of goods or services offered by the seller to the buyer, typically based on the volume of purchase. It is not recorded in the accounting records as it directly reduces the sales price before any transaction is recorded.

5 Must Know Facts For Your Next Test

1. Trade discounts are often offered to encourage bulk purchases.
2. They do not appear in financial statements because they are deducted from the invoice price before recording.
3. Unlike cash discounts, trade discounts are not contingent upon early payment.
4. These discounts are usually predetermined and stated in terms such as '10% off for orders over 100 units.'
5. Trade discounts can affect gross profit margins but do not impact net sales revenue reported.

Review Questions

Related terms

Cash Discount: A reduction given to buyers for prompt payment of their invoices.

Gross Profit Margin:

The difference between sales revenue and cost of goods sold, expressed as a percentage of sales revenue.

Invoice Price:

The amount billed to a customer after any applicable trade discounts have been applied.