Definition: A purchase discount, also called a cash discount, is a reduction in the price of a good if the buyer pays for it within the allowable period. In other words, this is an incentive that the seller gives to the buyer in hopes that the buyer will pay for the purchase in full before the actual due date.
What Does Purchase Discount Mean?
Obviously, a purchase discount is only relevant if the sale of goods is on credit or on account. Selling on account is popular in all industries and is most frequent between manufacturers and retailers. In an effort to increase sales, manufacturers usually allow retailers 30 days to pay for goods that are purchased. This means the retailer can buy products from their vendors at the beginning of the month and pay for the products at the end of the month.
This allows the manufacturers to increase their sales, but it also reduces their cash flow because cash from the sales isn’t being received immediately. This is why vendors traditionally offer purchase discounts to retailers. The retailers are likely to pay the vendors in full before the due date if they will get a slight discount on the price.
Most businesses allow credit terms of 2/10, n/30 or 2/10, net/30. This means the buyer can get an additional two percent discount if he pays for the goods in full within the first 10 days after the order was made. If the purchaser doesn’t pay for the goods in the first 10 days, the entire purchase price must be paid in 30 days.
Let’s assume Craig’s Retail Outlet purchase $1,000 worth of shirts from a manufacturer with credit terms of 2/10, n/30. Craig will receive a $20 discount if he makes his payment during the 10-day discount period otherwise he will owe the entire $1,000 at the end of the month. This might sound like a small reduction in price, but it can add up if every purchase a retailer makes is reduced by the same percentage.