Difference between trade discount and discount for prompt payment

Discounts are the cut in prices and services offered by the seller to the buyer. Discounts are given by the seller to encourage customers to buy more and to provide the best possible services at low rates. As we know that more sales for companies means higher profits for companies, discounting is one of the initiatives they take to achieve an increase in sales. The other sales techniques desired by firms are advertising, endorsements, new product lines, and product purchase prices. The misconception prevails that when a firm discounts, it suffers the loss, but it is not. Thus, since the company cut the profit margin to a certain extent and tried to make more profit by getting buyers to buy more of its products. There are two types of discounts, delivered to the buyer by sellers; trade discount and prompt payment discount. The trade discount is the discount offered by the seller at the time of purchase in the price list of the basic product or in the price catalog of that product or service. On the other hand, the prompt payment discount is the discount offered by the seller at the time of payment; this deduction is given on invoice.

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What is trade discount?

A commercial discount is the concession, incentive or deduction that the seller grants to the buyer at the time of the purchase of the products. The main objective of this type of discount is to capture the buyer to a greater extent and let him buy more and more products. No records of these discounts are kept in the ledgers by either the seller or the buyer; they are started purely to have bulk sales. The trade discount can be applied to both credit and cash payments. Mainly, the commercial discount depends directly on the purchase volume; as the purchase increases, the discount offered increases. The trade discount may also vary from supplier to supplier or depending on the type and quantity of the product purchased. There are several types of trade discounts given to the buyer;

What is the prompt payment discount?

A discount for prompt payment is the concession, incentive or deduction in the invoice of the products at the time of payment of the purchases. The real reason for the prompt payment discount is to guarantee the payment of the product by the buyer within the specified time, avoiding credit risk. Both the seller and the buyers register this discount. Prompt payment discounts are the rewards offered by sellers to buyers for making early payments while avoiding credit risk. The terms and conditions for this type of discount are pre-established and are established as the contractual agreement between both parties. The other important reason these accounts prove is cash payment of the bill rather than payment by check or credit card.

Trade Discount vs. Prompt Payment Discount

• A commercial discount is the concession, incentive or deduction that the seller grants to the buyer at the time of the purchase of the products. On the other hand, a discount for prompt payment is the concession, incentive or deduction in the invoice of the products at the time of payment for purchases.
• The main objective of this type of discount is to capture the buyer to a greater extent and let him buy more and more products. Contrary to this, the real reason for the prompt payment discount is to guarantee the payment of the product by the buyer within the specified time, avoiding credit risk.
• No records of trade discounts are kept in the ledgers of either the seller or the buyer, while prompt payment discounts are kept by the seller and buyers.