What is cash discount

Discount

Discount definition

Discount is an agreement between a company and its customers that allows the customer to deduct a percentage from the invoice amount when paying an invoice within a certain period of time.

So it's one Discount, which is granted when paying within a period of time in order to motivate customers to pay quickly or on time.

An exemplary payment term with a discount agreement is: "14 days 2% discount, 30 days net". The Discount of 2% means: If the customer pays within the first 14 days after the invoice date, he may deduct a 2% discount from the invoice amount; i.e. he only has to pay 98% of the invoice amount.

Gross or net discount? - The discount is taken from the invoice amount (and thus from the gross amount including sales tax). This on the one hand reduces the effort or the acquisition costs (the real benefit for the company) and on the other hand also reduces the deductible input tax amount.

Alternative terms: Discounts (plural), discounting, discount deduction.

Customer account and supplier account

Customer account

If a company grants its customers a discount, one speaks of Customer account.

Ultimately, the discount granted represents a cost component for the company that should be taken into account, for example, in the trade calculation.

The discount granted to the customer reduces sales as a reduction in sales within the meaning of Section 277 (1) of the German Commercial Code (HGB).

Supplier account

If, on the other hand, a company is granted a discount by its suppliers, one speaks of Supplier account or Delivery account (one also says in this case, if the discount is used: the company takes a discount).

The discount granted by the supplier reduces the acquisition costs as a purchase price reduction within the meaning of Section 255 (1) HGB.

Calculate discount

Discount calculation example

A company receives an invoice from a service provider (e.g. tax advisor) for a net amount of € 100 plus € 19 sales tax; i.e. the invoice amount is € 119 gross.

If the company pays within the granted discount period of 14 days, it may deduct 2% of the gross invoice amount: € 119 × 0.02 = € 2.38.

This reduces:

  • the net invoice amount by € 2 from € 100 to € 98 and
  • the sales tax of € 19 by € 0.38 to € 18.62 (control invoice: € 98 × 19% VAT = € 18.62).

The tax consultancy costs, which the company posts to other operating expenses, amount to € 98. The discount advantage for the company is only in the net account of € 2; For most companies (which are entitled to input tax deduction), the € 0.38 only affects the transitory sales tax and is therefore insignificant.

For another example of calculating the discount amount, see supplier credit: here the interest rate that you pay when you become clear becomes clear Not paid within the discount period and therefore does not use the discount.