What Is a Trade Discount

A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer. The reseller then charges the retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to it and the price at which it then sells the product to the final customer. The reseller does not necessarily resell at the suggested retail price; selling at a discount is a common practice, if the reseller wishes to gain market share or clear out excess inventory.

For example, ABC International offers its resellers a 30 percent trade discount. The retail price for a green widget is $2. One reseller orders 500 green widgets, for which ABC grants a 30% trade discount. Thus, the total retail price of $1,000 is reduced to $700, which is the amount that ABC bills to the reseller. The trade discount is therefore $300.

The trade discount may be stated as a specific dollar reduction from the retail price, or it may be a percentage discount. The trade discount customarily increases in size if the reseller purchases in larger quantities. A trade discount may also be unusually large if the manufacturer is trying to establish a new distribution channel, or if a retailer has a great deal of distribution power, and can demand the extra discount.

A manufacturer may attempt to establish its own distribution channel, such as a company website, so that it can avoid the trade discount and charge the full retail price to customers. This can cause disruption in the distributor network, and also may not increase company profits, since the company must now fulfill customer orders directly and provide customer service, as well as maintain the distribution channel.

You would not record a trade discount in the accounting records. Instead, you only record revenue in the amount invoiced to the customer. If you were