What is a cash discount?
A reduction in a product or service's sale price to cash-paying customers provided as part of a management strategy to increase sales, avoid the risks and costs of receivable collection and/or improve a company's immediate liquidity. Cash discounts also refer to price reductions for credit customers making payments within a specified discount period. For example, a discount offer noted by "2/10, n/30" means a credit customer may take a 2% discount on any cash payment made on the account within 10 days of the date of sale. However, if any portion of the price is not paid within that 10-day discount period, then that portion must be paid within 30 days with no discount. Cash discounts provided to a company's customers might alternatively be referred to as "sales discounts" and are accounted for on a company's books through the use of a contra-revenue account (sales discounts). From the customer's perspective, a cash discount may be referred to as a "purchase discount." Under a perpetual inventory accounting system any such discount is accounted for as a direct reduction in the cost of the inventory purchased.