What are trade discounts and cash discounts?
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Trade discount and cash discount sound similar but are treated very differently in accounting. The difference is often tested in transaction questions.
What a trade discount is
A trade discount is a reduction from the list price given to a buyer, usually for buying in large quantities or because the buyer is also a trader. It is deducted before the transaction is recorded.
How a trade discount is handled
A trade discount never appears in the accounts as a separate entry. The transaction is recorded at the net price after the discount. It works like a "silent" discount: only the amount recorded goes down.
What a cash discount is
A cash discount is a reduction offered to encourage quick payment, for example if a customer pays within a set period. It depends on when payment is made, not on quantity.
How a cash discount is handled
Unlike trade discount, cash discount is recorded in the accounts. Discount allowed (to customers) is an expense; discount received (from suppliers) is income. Both appear in the income statement.
The main difference
Trade discount reduces the price before recording and doesn’t appear in the accounts; cash discount relates to payment timing and is recorded as an expense or income. Confusing the two is a common mistake.
A simple example
If goods worth RM1,000 get a 10% trade discount, the transaction is recorded at RM900 with no discount entry. If that customer later pays early and gets a 5% cash discount, that RM45 is recorded as discount allowed.
Why this difference is tested
Questions often combine both kinds of discount to test whether students know which is recorded and which isn’t. Once you understand the logic, these questions become easy.
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FAQ
Is trade discount recorded in the accounts? No. It only reduces the amount recorded; the transaction is recorded at the net price after the discount.
How is cash discount recorded? Discount allowed to customers is an expense; discount received from suppliers is income.
What is the main difference? Trade discount relates to quantity and is deducted before recording; cash discount relates to prompt payment and is recorded in the accounts.