Cash discounts are reductions retailers take in the initial selling price of the product or service.

A cash discount is an incentive offered by a seller to a buyer for paying an invoice ahead of the scheduled due date.

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Cash discounts are incentives offered by sellers that reduce the amount that the buyer owes by either a percentage of the total bill or by a fixed amount.

For example, if an invoice is due in 30 days, a seller could offer the buyer a typical cash discount of 2% if they were to pay the invoice within the first 10 days of receiving it.

Small cash discounts benefit the seller because they increase the likelihood that a buyer will pay quickly. Cash discounts therefore provide the seller with cash faster; at times, it can be better to receive 95% of an invoice within a few days for example, rather than wait 30 or more days to receive the full amount.

Being paid early means that the seller can then reinvest the cash back into the business sooner.

Cash discounts vs. trade discounts

Cash discounts aren’t reductions in the agreed sales price of the goods or services at the time of the transaction – they are a reduction in the amount to be paid by a credit customer (to whom you have given credit terms) if that customer pays within a specified time period.

A cash discount is intended to persuade credit customers to pay their bills quickly – it’s not an incentive to make the purchase.

Cash discounts: shorthand

In accounting, usually the discount amount and the time period within which it’s available, are expressed in a format such as 2/10, n/30. This means a 2% discount is applied if the invoice is paid within ten days, otherwise the payment is due in its entirety within 30 days.

Cash discounts and VAT

If, as a supplier, you offer a cash discount on condition the invoice is paid early or within a specific time frame, the VAT charged can be calculated on the basis that the discount will be taken, meaning that the VAT will be a percentage of the net amount after discount.

Here is a simple example of calculating a 10% cash discount when working with VAT:

You’ll need to work out the net price of the goods (i.e. before VAT is added):

• E.g. £200.00

And then you’ll need to calculate the VAT:

• Goods £200.00

• 10% cash discount (£20.00)

• Goods after cash discount £180.00 

• VAT @ 20% of £180.00 = £36.00

• Gross invoice total £216.00

Recording cash discounts: net vs. gross method

In accounting, there are two different ways that cash discounts can be recorded in the books: the net method and the gross method.

The net method treats sales revenue as the net amount after the given discount, and any discounts that the buyer doesn’t take are recorded as interest revenue. The discounts are essentially treated as compensation to the seller for providing credit to the buyer.

The gross method views discounts that aren’t taken by the buyer as a portion of total sales revenue – not as separate interest earnings. The gross method is the most common in business practices today.

No matter which recording method is used, a cash discount taken by a buyer will reduce sales revenue.

Cash discounts and SumUp Invoices

SumUp Invoices allows you to add discounts directly to the subtotal of your invoices and takes care of the calculation for you. You can set the percentage and include the terms in our convenient invoice templates.

Glossary Chapter 19 allowance Specified deduction from list price, including a trade-in or promotional allowance. basing-point pricing System used in some industries during the early 20th century in which the buyer paid the factory price plus freight charges from the basing-point city nearest the buyer. bot (shopbot) Software program that allows online shoppers to compare prices of a particular product offered by several online retailers. bundle pricing Offering two or more complementary products and selling them for a single price. cannibalization Loss of sales of an existing product due to competition from a new product in the same line. cash discount Price reduction offered to a consumer, business user, or marketing intermediary in return for prompt payment of a bill. competitive bidding Inviting potential suppliers to quote prices on proposed purchases or contracts. competitive pricing strategy Pricing strategy designed to deemphasize price as a competitive variable by pricing a good or service at the level of comparable offerings. cumulative quantity discount Price discount determined by amounts of purchases over stated time periods. everyday low pricing (EDLP) Pricing strategy of continuously offering low prices rather than relying on such short-term price cuts as cents-off coupons, rebates, and special sales. FOB (free on board) plant (FOB origin) Price quotation that does not include shipping charges. FOB origin-freight allowed (freight absorbed) Price quotation system that allows the buyer to deduct shipping expenses from the cost of purchases. leader pricing Variant of loss-leader pricing in which marketers offer prices slightly above cost to avoid violating minimum-markup regulations and earn a minimal return on promotional sales. list price Established price normally quoted to potential buyers. loss leader Product offered to consumers at less than cost to attract them to stores in the hope that they will buy other merchandise at regular prices. market price Price a consumer or marketing intermediary actually pays for a product after subtracting any discounts, allowances, or rebates from the list price. market-plus pricing Intentionally setting a relatively high price compared with the prices of competing products; also known as skimming pricing. minimum advertised pricing (MAP) Fees paid to retailers who agree not to advertise products below set prices. noncumulative quantity discount Price reduction granted on a one-time-only basis. odd pricing Pricing policy based on the belief that a price ending with an odd number just under a round number is more appealing, for instance, $9.97 rather than $10. opening price point An opening price below that of the competition, usually on a high-quality, private-label item. penetration pricing strategy Pricing strategy involving the use of a relatively low entry price compared with competitive offerings, based on the theory that this initial low price will help secure market acceptance. postage-stamp pricing System for handling transportation costs under which all buyers are quoted the same price, including transportation expenses; also known as uniform-delivered price. price flexibility Pricing policy permitting variable prices for goods and services. pricing policy General guideline that reflects marketing objectives and influences specific pricing decisions. product-line pricing Practice of setting a limited number of prices for a selection of merchandise and marketing different product lines at each of these price levels. profit center Any part of an organization to which revenue and controllable costs can be assigned. promotional allowance Promotional incentive in which the manufacturer agrees to pay the reseller a certain amount to cover the costs of special promotional displays or extensive advertising. promotional pricing Pricing policy in which a lower-than-normal price is used as a temporary ingredient in a firm's marketing strategy. psychological pricing Pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers. quantity discount Price reduction granted for a large-volume purchase. rebate Refund of a portion of the purchase price, usually granted by the product's manufacturer. skimming pricing strategy Pricing strategy involving the use of a high price relative to competitive offerings. step out Pricing practice in which one firm raises prices and then waits to see if others follow suit. trade discount Payment to a channel member or buyer for performing marketing functions; also known as a functional discount. trade-in Credit allowance given for a used item when a customer purchases a new item. transfer price Cost assessed when a product is moved from one profit center within a firm to another. uniform-delivered pricing Pricing system for handling transportation costs under which all buyers are quoted the same price, including transportation expenses. Sometimes known as postage-stamp pricing. unit pricing Pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count. zone pricing Pricing system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region.

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