What is Cash Discounts?
Cash discounts are price reductions a seller offers to a buyer who pays an invoice before a specified date. Unlike trade discounts, cash discounts are tied to payment timing rather than the price list.
How It Works
- Set the discount terms on the invoice — for example, ‘2/10 net 30’.
- If the buyer pays within the discount window, deduct the discount from the invoice total.
- The seller records a sales discount (contra-revenue) for the deducted amount.
- The buyer records a purchase discount that reduces inventory cost or expense.
- Adjust output and input VAT if the discount is structured as a price reduction.
Saudi Context
Under Saudi VAT, cash discounts known at the time of issuing the tax invoice should reduce the VAT base on the original invoice; later discounts require a credit note that adjusts both output and input VAT. ZATCA reviews discount treatment during VAT audits.
Example
A SAR 100,000 invoice with terms ‘2/10 net 30’ is paid on day 8. The buyer pays SAR 98,000. The seller records SAR 2,000 sales discount and the buyer records SAR 2,000 reduction in inventory cost.