Posted in Marketing and Strategy Terms, Total Reads: 435
Definition: Sales Discount
A sales discount can be defined as the process of reducing the product’s price which is quoted by the seller, in lieu of an early payment made by buyer. It may be offered when the seller is in dire need of cash, or if the seller wishes to reduce the amount recorded as its receivables outstanding for some reasons. It is an incentive for the buyer to pay early so as to avail the discount. If the buyer doesn’t has enough money he can pay the full amount on a later pre-decided date but will loose on the sales discount.
There are two ways of accounting for sales which offer sales discounts.
1) The gross method
2) The net method
Let us assume that company A sells any certain good at a price of INR 5,500 with terms of payment of “2/10 n/20”. These terms of payment states two clauses –
1) The customer should pay within a period of 20 days after sale.
2) If the payment is made within a period of 10 days, the customer will be entitled to avail a 2% sales discount on the initial price.
So, the buyer can either pay INR 5000 within 10 daysof the sale and avail a discount of INR 500 which is 10 % of INR 5,500 which was the initial price or pay INR 5,500 after 10 days and before or on the 20th day after sale and lose out on the sales discount of INR 500 offered by the seller.