Meaning of Cash Discount

If we talk to the point about “what is cash discount”, we can say that it is that amount which is not taken by seller out of his total receivable amount which has to receive from customer. If customer pays on the time, seller or vendor will give 1% to 10% discount out of total receivable amount.

Suppose, Ram is seller and Sham is buyer. Sham buys Rs. 10,000 goods on credit from Ram and pays after 15 days. Ram allows him 10% cash discount. It means Rs. 1000 is the value of cash discount will be debited in the books of Ram (when he will receive his cash of sold goods) because it is loss of Ram and it will be credited in the books of Sham because it is gain of Sham. In the books of Ram, this cash discount will be treated as Discount Allowed and in the books of Sham; it is treated Discount Received account.

Main aim of providing cash discount is to receive cash fastly from customer and also motivate to customer if he pays on the time.