Cash discount

What it means

A reduction in the amount payable, allowed for settlement within a stated period; recorded as discount allowed or discount received.

Example

A customer pays early and takes a 2% cash discount.

Why it matters

Cash discount is recorded: discount allowed (an expense) or discount received (income).

In practice

Unlike a trade discount, a cash discount is a real ledger entry made when the invoice is settled. The customer receives a discount allowed, which is an expense in the income statement, debited to the discount allowed account. The supplier granting it records the same amount as discount received, an item of other income. So one trader's discount allowed is the other's discount received.

Imagine an invoice of RM500 offering 2 per cent for payment within a week. The customer pays in time and sends RM490. The seller debits cash RM490 and discount allowed RM10, and both entries clear the RM500 customer balance.

Students often confuse it with a trade discount, which is deducted before the invoice is prepared and never touches an account. A quick test: if the reduction depends on when payment is made, it is a cash discount. If it depends on who the buyer is, it is a trade discount.

If discount entries often go on the wrong side, one of our teachers can work through some cash book examples with you. Book a trial class.

Related terms

• Discount allowed
• Discount received
• Trade discount

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 2.3 Books of prime entry (page 12).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.