Definition of Cash Discount
A cash discount is a deduction allowed by some sellers of goods or by some providers of services in order to motivate customers to pay within a specified time. The cash discount is also referred to as an early payment discount.
The sellers and providers offering a cash discount will refer to it as a sales discount, while the buyer will refer to the same discount as a purchase discount.
Examples of a Cash Discount
Let's assume that a company offers a cash discount and it is printed on its sales invoices as 1/10, net 30. Let's also assume that a sales invoice is for $1,000 and the buyer has been authorized to return $100 of goods. Therefore, the net amount due to the seller within 30 days is $900. However, the buyer may deduct $9 (1% of $900) if the buyer pays the seller $891 within 10 days of the invoice date. The seller will usually record the $9 cash discount with a debit to the account Sales Discounts. The buyer will record the $9 savings as a credit to Purchase Discounts or as a reduction to the cost recorded in inventory.
My dentist offers a 5% cash discount if the dental fee is paid on the day of the service. This discount is offered to avoid the expenses of billing, mailing statements for unpaid amounts, processing partial payments, not collecting amounts owed, etc. The dentist and others accept credit card payments and pay a fee to a credit card processor in order to avoid similar expenses.