There are many differences between trade and cash discounts. A trade discount is used to encourage more sales whereas a cash discount is used to encourage prompt payment of invoices.
Net purchases is equal to the gross purchases of goods from suppliers less the amount of purchase returns, allowances, and discounts. To arrive at the total cost of goods purchased the business needs to add the cost of freight-in needed to deliver the goods to their present location and condition ready for sale to customers.
The chain discount calculator works out a products net price after applying multiple trade discounts to its list price. This free Excel calculator also provides a summary showing the original price, total discount, and net price, together with a calculation of the single equivalent rate (SED).
A business has been invoiced 500 for goods and takes a 2% cash settlement discount for early payment.
The original invoice would have been posted to accounts payable, so the balance before settlement on the suppliers account is 500. A 2% discount on 500 is 10, and the amount of cash the customer pays is therefore 490.
A customer has been invoiced 100 for goods and takes a 5% cash settle discount for early payment.
The original invoice would have been posted to the debtors control, so the balance before settlement on the customers account is 100. A 5% discount on 100 is 5, and the amount of cash the customer pays is 95.