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What is Trade Discount in Accounting?

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In accounting, a trade discount is a reduction in price a manufacturer or wholesaler offers a trade buyer on the list price of goods.

Purpose of Trade Discounts

The purpose of a trade discount is to encourage the reseller to purchase a larger quantity of the manufacturer’s or wholesaler’s products. A trade discount is different from a sales discount, which is a reduction in price offered to the customer by the reseller. Trade discounts are not recorded in the accounting records of the reseller, while sales discounts are.

The size of the trade discount offered depends on the quantity of the goods purchased and the relationship between the manufacturer or wholesaler and the reseller. For example, a manufacturer may offer a higher trade discount to a reseller who purchases a large quantity of goods.

The trade discount is deducted from the list price of the goods when the reseller calculates its cost of goods sold (COGS). The trade discount is not recorded as an expense in the accounting records of the reseller.