What is the Difference Between Trade Discount and Settlement Discount?

The main difference between trade discount and settlement discount lies in the timing of when the discount is granted and the purpose of the discount. Here are the key differences:

• Trade Discount:
• Applied at the time of conducting the sale.
• Intended to encourage customers to purchase more products, often in larger quantities.
• The discount can increase as the customer purchases more items.
• Trade discount is not recorded in accounting entries, but it reduces the value of purchase and sale.
• Settlement Discount:
• Allowed at the time of payment.
• Purpose is to ensure that customers settle their debts within a short period of time.
• Settlement discount does not reduce the value of purchase or sale, but it is recorded in accounting entries.
• For example, a 10% discount might be offered if customers can pay off and settle their debts within a specified timeframe.

Both trade and settlement discounts aim to increase sales revenue and maintain a positive relationship with customers. However, they serve different purposes and are applied at different times in the sales process.

Comparative Table: Trade Discount vs Settlement Discount

The main difference between trade discount and settlement discount lies in the timing of the discount:

Trade discounts are commonly seen between companies who sell products business-to-business (B2B) and are used to retain business by incentivizing the buyer to buy products in large quantities. On the other hand, settlement discounts, also known as cash discounts, are used to encourage customers to pay their bills early, which helps the seller reduce their outstanding accounts receivable and receive payments quickly.