Trade discount
A trade discount is a percentage reduction off list price given to a class of customer, such as wholesalers, deducted before any invoice is recorded, so it never appears anywhere in the accounting records.
What it is
See it move
A waterfall shows a manufacturer's €500 list price per unit, ordered ten units for a €5,000 gross value. A 20% trade discount of €1,000 applies before the invoice is drawn up, so it never generates any accounting entry at all. Only €4,000, the discounted invoice price, is recorded as sales revenue and as a purchase in the two parties' books.
The formula
Variables
- Invoice (recorded) price (€)
- List price before any trade discount (€)
- Trade discount rate (%)
Gives the amount actually recorded as the sale or purchase; the discount itself is never separately posted.
Check yourself
A supplier's list price for a batch of goods is €1,200. A retail customer qualifies for a 15% trade discount because it buys directly from the manufacturer rather than through a distributor. What amount is recorded as the sale?