CASH DISCOUNTS
Cash Discounts vs. Trade Discounts
While are offered to "prospect buyers", Cash Discounts are given to "buyers", that is, cash discounts are given to those customers who have already purchased the products or services of the company. Businesses give cash discounts to credit customers as an incentive for early payment. By offering a small reduction in the invoice amount, businesses encourage faster cash flow, reducing the risk of payment defaults, and improving liquidity. Additionally, it enhances customer loyalty.
Cash discounts are viewed or called differently depending on the perspective. Cash discounts are called "Purchase Discounts" from the buyer's viewpoint while it is called "Sales Discounts" from the seller's viewpoint.
Format, Credit Terms
Cash Discounts are contained in "Credit Terms" the typical example of which is "2/10, n/30". As the name suggests, these "terms" are the terms and conditions that pertain to the cash settlement of the sale. Here are their meanings of each part:
"2" is discount rate. If you avail of the discount, 2% will be deducted from the supposed cash payment had it been paid full.
"10" is discount period. If you pay within 10 days from the date of sale, you will avail of the 2% discount. If you miss the 10th day and paid on the later date, then you pay the whole purchase price.
"n" is "net".
"30" is credit period. The entire obligation/ payable can be settled within 30 days from the date of purchase.In the counting of days, "exclude the first, include the last."
Example:
S is a seller of mobile phones. He offered to B ( a prospect buyer) a phone with an original/ regular retail price of P25,000.00 (list price) with trade discount of 7. B took the offer but only wrote a contract of credit purchase with credit term 2/8, n/20.
The following are the necessary entries:
1. At the date of sale
Accounts receivable --- P23,250.00
Sales ---------------------P23,250.00*
*
Invoice price = List Price - Trade discount
Invoice price =P25,000.00 - (P25,000.00 x 7%)
2. At the date of payment (within 8 days)
Cash ---------------P22,785.00
Sales discounts-- 465.00**
Accounts receivable -- P23,250.00
*
Cash discount = Invoice price x discount rate
Cash discount = P23,250.00 x 2%
2. At the date of payment (beyond the 8th day)
Cash ---------------P23,250.00
Accounts receivable -- P23,250.00