Definition: A sales discount is a cash discount that manufacturers often give retailers for paying off accounts during the discount period. A sales discount is useful for both the retailer and the manufacturer. The retailer can pay less for its inventory while the manufacturer can receive its cash sooner.
What Does Sales Discount Mean?
Most retailers buy inventory on account or on credit. Rarely does a retail chain pay manufacturers for inventory and supplies in cash. Most of the time the retailer has an account or line of credit with the manufacturer to buy inventory. These retailers can often receive a cash discount or sales discount if the balance on their account is paid off in a certain period of time.
Remember, cash flow is important to any business. Manufacturers and wholesalers don’t want to have outstanding accounts receivable. They want cash to pay their own bills and meet their own current liabilities.
Example
An additional 2 percent sales discount is a standard cash discount for most businesses. The terms of this discount are usually written like 2/10, n/30 or 2/10, net/30. This means that if the retailer pays the manufacturer cash for the inventory within the first 10 days after purchase, the retailer will receive a discount of 2 percent.
If the retailer can’t pay for the inventory in the first 10 days, the full-undiscounted purchase price is due 30 days from the purchase date. Retailers can use two ways to account for a cash discount: the gross method and the net method.
