A reduction in the invoice amount offered by a seller to a buyer as an incentive for paying before the standard due date.
Cash Discount (also called settlement discount or early payment discount) encourages faster payment collection. It's expressed as terms like '2/10 Net 30' meaning 2% discount if paid within 10 days, otherwise full amount due in 30 days. For the seller, the discount cost is offset by improved cash flow, reduced collection costs, and lower bad debt risk. For the buyer, taking the discount represents a very high annualized return (e.g., 2/10 Net 30 = ~36.7% annualized return). Cash discounts are recorded as expenses by the seller and income by the buyer, and they reduce the GST-liable amount since they're known at the time of supply.
Invoice: ₹1,00,000, terms 2/10 Net 30. If buyer pays within 10 days: pays ₹98,000 (saves ₹2,000). If buyer doesn't take discount: annualized cost = (2% ÷ 98%) × (365 ÷ 20) = 37.2%. It's almost always better to take the discount, even if borrowing money to do so.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
A trade discount is given on the list price before invoicing (e.g., 20% dealer margin) — it's not shown separately in accounts. A cash discount is given after invoicing as incentive for early payment — it's recorded as a separate entry (discount allowed/received). Trade discount reduces invoice amount; cash discount reduces payment amount.
If the discount is known at the time of supply and linked to the invoice, it reduces the taxable value. If it's offered after the supply (post-sale), the supplier issues a credit note to adjust the GST. The buyer must reverse proportionate ITC as per Section 16(4).
A commercial document issued by a seller to a buyer, detailing the products or services provided, quantities, prices, and payment terms.
The time duration a seller allows a buyer to pay for goods or services after delivery, typically expressed in days (e.g., Net 30, Net 60).
Money owed to a business by its customers for goods or services delivered but not yet paid for.
A reduction in the list price of goods offered by a manufacturer or wholesaler to a reseller, based on trade relationship, volume, or distribution channel.
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