Cash discount, in accounting, is a reduction in the price of goods or services offered to customers who pay their invoices early. For example, a vendor may offer a 2% discount for payments made within 10 days of the invoice date.
Calculating cash discounts is essential for businesses because it helps them manage their cash flow and improve their profitability. Understanding the mechanics of cash discounts also allows businesses to take advantage of early payment incentives and negotiate better payment terms with their suppliers.