Financial Accounting Concepts

What is Trade Discount? Treatment of Trade Discounts

Trade discounts are discounts given to customers who purchase goods or services in large quantities or on a regular basis.

These discounts are meant to encourage customers to buy more from the seller, and they are often a percentage of the list price.

In this blog post, we will explain what trade discounts are and how they are treated in the books of accounts.

What is a Trade Discount?

A trade discount is a reduction in the list price of goods or services a seller offers its customers. The discount is based on the quantity of goods or services purchased, the frequency of purchases, or any other factors that the seller considers. Trade discounts are also known as functional discounts, volume discounts, or quantity discounts.

For example, a manufacturer of electronic products may offer a 10% trade discount to a retailer who purchases more than 100 units of a specific product. The trade discount allows the retailer to sell the product at a lower price while maintaining a reasonable profit margin. On the other hand, the manufacturer benefits by selling a large quantity of goods.

Treatment of Trade Discount in Books of Accounts

Trade discounts are not recorded as separate transactions in the books of accounts. Instead, they are treated as a reduction in the purchase or sales price of the goods or services.

For example, if the list price of a product is $100, and a 10% trade discount is offered, the invoice price would be $90 ($100 – $10).

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