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What's the difference between trade and sales discount?
The trade discount is a discount given from the seller to the buyer for the goods purchased, an amount less off from the list price, whereas the sales discount (a.k.a. cash discount) is a discount given from the seller to the buyer on prompt payment.
Trade Discount
Depending on the accounting software, some may apply a lump sum or a percentage on the invoice subtotal, and some may use an itemised discount method when applying a trade discount.
Although the lump sum discount is simple and easier for data entry, the itemised discount method allows the management to analyse the profitability of each product or calculate commission based on a product margin basis.
Itemised discount
MoneyWorks accounting system using an itemised discount method, in which each detail line has its dedicated discount percentage. For example, when invoicing a customer for a product:
BA100 $100 with a 10% discount, it gives a total of $90.
Assuming the product cost is $60, you can print a Sales by Product analysis report to show the cost, sell price, and margin (i.e. $60, $90, and $30). Besides analysing the product sales, you can also print a commission report based on product sales price or margin (e.g. 10% on product margin).
A lump sum discount
On the other hand, you cannot analyse individual product margin if you are using a lump sum discount.
For example:
You create a discount item (can be a product item type) from the item list and link it to the Trade Discount account (income type) or the Sales account.
Assuming you created an invoice to the customer for:
BA100 at $100
BB100 at $130
and give a discount of $30, the invoice will be:
Although the Profit and Loss report shows an income of $200, the product analysis report will show as (assuming both has the same cost of $60):
The analysis report does not include the discount on the product itself since it applied at the transaction level instead of the product level.
The itemised discount method gives an additional level of analysis, although both produce a similar income statement.
MoneyWorks is a powerful small business accounting system; book a demo to find out more.
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