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What is a cash discount?

A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to motivate the customer to pay within a specified time. The seller or provider often refers to the cash discount as a sales discount. The buyer often refers to the same discount as a purchase discount. The cash discount is also known as an early payment discount.

Not all sellers offer cash discounts, but a common cash discount is 1/10, net 30 and it will appear on the sales invoice. If the invoice is $1,000 and the buyer returns $100 the net amount due to the seller is $900 if paid within 30 days. However, the buyer can deduct $9 (1% of $900) if the buyer pays the seller $891 within 10 days of the invoice date. The seller often records the $9 cash discount as Sales Discounts. The buyer will record the $9 savings as Purchase Discounts or as a reduction to the cost recorded in inventory.

Occasionally some service providers allow a cash discount if their fee is paid at the time of the service. For example, my dentist allows a cash discount of 5% to patients without insurance if they pay on the day of the service. This cash discount saves the time and cost of billing, mailing statements, receiving partial payments, and can result in the dentist having more cash and less receivables.