Trade Discount, Cash Discount & Successive Discounts
1. Commercial Discount Terminology
In retail and wholesale commerce, merchandise passes through distinct price checkpoints:
Sequential Progression of Commercial Price Terms
List Price (LP)
Catalog / Marked Price (MRP)
➔
Less: Trade Discount
Wholesale bulk allowance
➔
Invoice Price (IP)
Recorded in Sales/Purchase Books
➔
Less: Cash Discount
Prompt payment incentive
➔
Net Cash Paid
Final monetary settlement
2. Distinctive Comparison: Trade Discount vs. Cash Discount
| Basis | Trade Discount | Cash Discount |
|---|---|---|
| Objective | To facilitate wholesale trade, bulk buying, and enable retailers to earn a margin at retail MRP. | To incentivize prompt payment before expiry of credit period. |
| Basis of Deduction | Allowed on the List Price / Catalog Price. | Allowed on the Invoice Price / Net Due Amount. |
| Accounting Entry | Not recorded in the books of accounts; invoice is prepared at net figure. | Recorded in books (Discount Allowed / Received accounts). |
| Timing | Allowed at the very time of transaction / purchase. | Allowed only if payment is tendered within the prompt cash window. |
3. Successive Discount Series
In wholesale commerce, manufacturers frequently quote multiple successive discounts (e.g., “20% and 10% off”).
Single Equivalent Discount Formula
Formula for Two Successive Discounts (d₁% and d₂%)
Single Equivalent Discount (D_eq):
D_eq = [ d₁ + d₂ - (d₁ × d₂) / 100 ]%
Example: For successive discounts of 20% and 10%:
D_eq = 20 + 10 - (20 × 10) / 100 = 30 - 2 = 28% (Not 30%!).
D_eq = [ d₁ + d₂ - (d₁ × d₂) / 100 ]%
Example: For successive discounts of 20% and 10%:
D_eq = 20 + 10 - (20 × 10) / 100 = 30 - 2 = 28% (Not 30%!).
Formula for Three Successive Discounts
Net Selling Price (SP):
SP = LP × [1 - d₁/100] × [1 - d₂/100] × [1 - d₃/100]
Equivalent Discount:
D_eq = 100% - Percentage of LP Paid
SP = LP × [1 - d₁/100] × [1 - d₂/100] × [1 - d₃/100]
Equivalent Discount:
D_eq = 100% - Percentage of LP Paid
4. Worked Numerical Problem
Question: A wholesale distributor quotes furniture at a list price of ₹40,000 subject to successive trade discounts of 20% and 10%, plus an additional cash discount of 2% if paid within 10 days. Calculate the final net cash paid if settled on Day 5.
Step-by-Step Solution:
- List Price = ₹40,000
- Apply First Trade Discount (20%):
- Discount 1 = 20% of 40,000 =
(20 / 100) × 40,000 = ₹8,000 - Price after first discount =
40,000 - 8,000 = ₹32,000
- Discount 1 = 20% of 40,000 =
- Apply Second Trade Discount (10% on remaining balance):
- Discount 2 = 10% of 32,000 =
(10 / 100) × 32,000 = ₹3,200 - Invoice Price (Net Bill Amount) = 32,000 - 3,200 = ₹28,800
- Discount 2 = 10% of 32,000 =
- Apply Cash Discount (2% on Invoice Price for prompt payment):
- Cash Discount = 2% of ₹28,800 =
(2 / 100) × 28,800 = ₹576
- Cash Discount = 2% of ₹28,800 =
- Final Net Cash Paid:
- Net Cash Paid =
28,800 - 576 = ₹28,224 - Total Savings for buyer = ₹8,000 + ₹3,200 + ₹576 = ₹11,776
- Net Cash Paid =