What is A Trade Discount?

A trade discount is a reduction in the listed price of goods or services offered by a seller to a buyer, typically given as a percentage. This type of discount is often provided to customers who purchase in bulk, to wholesalers, or to regular or long-term clients.


Key points about trade discounts:

  1. Purpose: The main aim is to encourage larger orders, foster customer loyalty, and improve cash flow by incentivizing early payment or large purchases.
  2. Calculation: It is usually calculated as a percentage off the list price. For example, a 10% trade discount on a $100 item means the buyer pays $90.
  3. Accounting: Trade discounts are not usually recorded in the accounting books. Instead, the sales and purchases are recorded at the net amount after the discount.
  4. Negotiation: Trade discounts are often subject to negotiation between the buyer and seller, depending on the relationship and the volume of goods being purchased.
  5. Invoice: The discount is generally deducted directly on the invoice, showing the buyer the final amount to be paid after the discount.

By offering trade discounts, businesses can boost sales volume, build stronger relationships with customers, and maintain a competitive edge in the market.