Types of discounts offered on a sale

A discount is a reduction to the price of the sales of goods or services. There are different types of discounts that may be given or offered for different reasons.

In the video, the Kaplan tutor explains the three different types of discount, when they are offered and why they are given.

A summary of the discounts follows:

A trade discount

A trade discount is a definite amount that is deducted from the list price of the goods for the supplies to some customers, with the intention of encouraging and rewarding customer loyalty.

It will appear on the invoice and will be deducted from the list price of the goods before VAT is calculated. The calculation of the trade discount on the face of the invoice should be checked and it should be agreed that the correct percentage of trade discount has been deducted.

Bulk discount

A bulk discount is similar to a trade discount in that it is deducted from the list price of the goods and disclosed on the invoice. However, a bulk discount is given by a supplier for sales orders above a certain quantity.

A bulk discount must be checked to the agreement between customer and supplier, to ensure that the correct amount has been deducted. The deduction of a bulk discount will appear on the invoice, deducted from the list price before VAT is calculated.

Prompt payment discount

Prompt payment discounts (also known as settlement or cash discounts) are offered to customers in order to encourage early payment of invoices.

The details of the prompt payment discount will normally be shown at the bottom of the sales invoice and it is up to the customer to decide whether to pay the invoice early enough to benefit from the prompt payment discount or whether to delay payment and ignore the prompt payment discount. No deduction will occur for a prompt payment discount on the invoice, it will just be offered to the customer. The agreement between the customer and supplier should be checked to confirm that the correct percentage of prompt payment discount according to the terms has been offered.

A trade discount or a bulk discount is a definite reduction in price from the list price whereas a prompt payment discount is only a reduction in price if the organisation decides to take advantage of it by making early payment.

VAT calculations and discounts

VAT is calculated after trade and bulk discounts have been deducted from the original list price. Prompt payment discounts are only offered on an invoice so it does not impact the VAT calculation at the point of the invoice preparation.

If the customer goes on to take advantage of a prompt payment discount offered, the VAT amount is adjusted accordingly. This adjustment isn’t something we will focus on in this course.