Definition: Cash Discount

Cash discount is a rebate or allowance from the amount due granted by the creditor to the debtor at the point when the debtor makes payment before the due date.

Cash discount is offered to encourage early payment.

If payment is due within a specified period after the invoice date, the number of days should be mentioned (e.g., if there are 10 days to make the payment, then it can be expressed as n/10).

It means that if the payment is made before the due date, then the discount will be allowed to the purchaser.

In case the payment is made after the due date, cash discount will not be granted. The number of days is preceded by the rate of discount, and it is expressed as 5/10.

This means that if payment is made before the due date, then a 5% discount will be allowed to the purchaser.

Example

Let’s consider some examples of these expressions:

2/10, n/30: This means that there are 30 days in total to make payment. If the payment is made within 10 days, then a 2% discount will be given to the purchaser.

5/15, n/30: This means that the total number of days available to make the payment amounts to 30. Also, a discount of 5% will be given to the purchaser if payment is made within 15 days.

What is a cash discount?

A cash discount is a rebate or allowance from the amount due granted by the creditor to the debtor at the point when the debtor makes payment before the due date.

How is cash discount calculated?

The formula for calculating cash discount is: Cash Discount = 100/Discount % Where, Cash Discount is the rebate or allowance from the amount due and Discount Percent is provided by the creditor to induce early payment.

What are some examples of a cash discount?

5/10 means that a 5% discount will be granted if payment is made within 10 days. 4/15, n/60 means that a 4% discount will be granted if payment is made within 15 days from the invoice date and a discount of 5% will be given if payment is made before 60 days from the invoice date.

What is the benefit of a cash discount?

A cash discount is offered to encourage early payment. It means if the payment is made before the due date, then a discount will be allowed to the purchaser. In case the payment is made after the due date, a cash discount will not be granted.

What is the effect of a cash discount on the balance sheet?

A cash discount will have an effect on both assets and liabilities. It will reduce Accounts Receivable from creditors as well as accrued expenses from accruals.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.