Discounts and Invoices: Discounts and Allowances Overview

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Description: Discounts and Allowances are reductions to the selling price of goods or services that can be applied anywhere in the distribution channel. Learn more about discounts and allowances with this tutorial.

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Discounts and Allowances: An Introduction
Cash Discounts
Trade Discounts
Partial Payment Discounts
Quantity Discounts
Trade Allowances

Discounts and Allowances: An Introduction

Discounts and Allowances are reductions to the selling price of goods or services. They can be applied anywhere in the distribution channel between the manufacturer, middlemen (such as distributors, wholesalers, or retailers), and retail customer. Typically, they are used to promote sales, reduce inventory, and reward or encourage behaviors that benefit the issuer of the discount or allowance.

There are several different types of discounts and allowances, as show below:

Cash Discounts

These are typically used by sellers to encourage buyers to pay earlier, improving the seller's cash flow. Cash Discounts can be expressed in many ways, including 3/15 net 30 which means the full (net) amount is due in 30 days, but a 3% discount is available if paid within 15 days. Cash discounts can also be tied to different methods of dating, including:

EOM Dating, which starts the payment clock at the end of the month;
Ordinary Dating, which starts the payment clock at the date of the invoice;
ROG Dating, which starts the payment clock when the buyer receives the goods;
X Dating, which starts the payment clock X days after the invoice date.

(See more examples of cash discounts.)

Trade Allowances

Sellers use trade allowances to reward buyers for participating in promoting the seller's products. Examples of this are the in-store displays you encounter in supermarkets and electronics stores, and featured ads in store advertisements. Also referred to as promotional allowances, these also include other discounts and rewards used by sellers to "convince" buyers to stock their product. While some in the industry question the ethical status of trade allowances (claiming they are tantamount to bribery), others consider them to be a legitimate cost of doing business.