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. Let's consider some examples of these expressions:Definition: Cash Discount
Example
Cash Discount FAQs
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.
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.
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.
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.
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 Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, 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.
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