Question

What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?

Short answer

Trade discount helps to increase the level of sales for a company, providing the product at a lower price and customer loyalty. A seller does not record the trade discount the same as the cash discount because the price for the product calculated after deducting the trade discount is considered as the accurate, fair market price.

Step-by-step solution

Meaning of Trade Discount

The termtrade discountrefers to the amount of discount offered by the seller to his customer before proceeding to the final billing price, which provides the product at a reduced cost.

A seller offers a trade discount to differentiate the price of a similar product from its competitors.Reducing the billing amount helps the seller to increase the sales levelfor the business, which subsequently helps in higher net income for the business.

Reason why trade discounts are not recorded same as cash discounts

The reason why trade discounts are not included in accounts similar to cash discounts is that cash discounts affect the billing amount at which a customer is willing to sell his product to his customer. Therefore, the price calculated for the product is measured as the final selling price after deducting the trade discount.