Tag Archives: Sales Discount

Itemised discount vs a Lump sum discount

Software: MoneyWorks accounting systems

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.

Itemised discount on sales invoice

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.

Discount item

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:

lump sum discount on sales invoice

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.

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Prompt Payment Discount (Sales Discount)

Software: MoneyWorks #accounting software

A Sales Discount (or Cash Discount) is a discount given at the point of payment. It encourages prompt payment and helps in cash flow management. Example, you give a 10% discount for invoices which has paid within the payment terms or earlier.

Debtor Profile

To help in managing the accounts receivable, you can set a “Prompt Payment Discount” in the Pricing & Terms tab of the debtor profile. Once the perimeter has setup, MoneyWorks will calculate the validity of the invoices that are enjoying the discount when payment received.

Prompt Discount

Assuming you have set the prompt payment discount as within 30 days at 10% discount. When an invoice has recorded on 1 June 2016, the customer enjoys a 10% discount if he paid before 1 July 2016 (within 30 days from the invoice date).