Trade Discount

A trade discount is a reduction from a seller's list or catalog price that is granted to certain customers, usually other businesses in the supply chain, when the price is agreed. A manufacturer may offer a 40 percent discount from its suggested retail price to retailers, a larger discount to wholesalers, and extra discounts for large orders. Trade discounts let a seller keep one published price list while charging different customer groups different prices.

In accounting, trade discounts are not recorded as a separate item. The sale, and the purchase on the buyer's side, is recorded at the invoice price after the discount. This distinguishes them from cash discounts, such as an early payment discount, which depend on when the customer pays and are recorded separately as sales discounts by the seller and as a purchase discount by the buyer.

For a single discount, the net price is:

Here $\text{List price}$ is the catalog or suggested retail price and $d$ is the trade discount rate as a decimal. Sellers often quote chain discounts, a series of discounts applied one after another, such as 30 percent, 10 percent and 5 percent. Each discount is applied to the price remaining after the previous one, so they cannot simply be added:

Here $d_{1}$, $d_{2}$ and $d_{3}$ are the successive discount rates. A chain of 30, 10 and 5 percent equals a single discount of about 40.15 percent, not 45 percent.

A tool manufacturer lists a cordless drill at $250. A hardware store receives a trade discount of 30 percent, plus 10 percent for ordering more than 100 units. It orders 120 drills. The net price per drill is $250 times 0.70 times 0.90, or $157.50, and the invoice totals 120 times $157.50, or $18,900. The credit terms are 2/10, net 30.

The manufacturer records a debit to accounts receivable and a credit to sales of $18,900. Nothing is recorded for the $11,100 difference between list price and invoice price. The hardware store debits inventory, or purchases under a periodic system, and credits accounts payable for $18,900. If the store pays within ten days, it takes a further 2 percent cash discount of $378 and pays $18,522. That cash discount is recorded, unlike the trade discount.

• Channel pricing: one list price can serve retail customers, while trade customers get a margin for reselling, linked to their markup.
• Volume incentives: larger buyers receive bigger discounts, reflecting lower costs of serving them.
• Simpler price changes: a seller can update discount rates rather than reprinting catalogs.
• Competitive positioning: discounts can be tailored to particular customers or markets without changing published prices.

Because trade discounts are excluded from the recorded sale, gross sales already reflect them, and they do not appear among the deductions used to reach net sales. For the buyer, inventory is recorded at the discounted cost, which forms part of the cost of goods purchased. Sales tax, where it applies, is generally calculated on the discounted selling price. Under ASC 606 and IFRS 15, revenue is measured at the transaction price the seller expects to receive, which already reflects trade discounts; volume rebates paid after the sale, however, are variable consideration and must be estimated. Businesses should record the agreed discount terms in customer contracts so that invoices are accurate and auditors can verify that prices charged match approved price lists.