What is Trade Discounts?
Trade discounts are reductions from the list price that a seller grants to a buyer at the time of sale, often based on volume, customer category, or trade relationship. They are deducted before the invoice is issued and not separately recorded.
How It Works
- Determine the buyer’s eligibility for the discount based on volume, channel, or contract.
- Apply the discount to the list price to get the invoice price.
- Invoice the buyer at the net price — the discount itself is not a line item.
- Record revenue at the net price in the seller’s books.
- Record the inventory or expense at the net price in the buyer’s books.
Saudi Context
Under Saudi VAT, trade discounts applied at the time of the supply reduce the VAT base directly on the original invoice. The invoice should clearly show the gross amount and the discount when phase-2 e-invoicing requires.
Example
List price SAR 1,000,000. The wholesaler offers a 10% trade discount to a key distributor, so the invoice is SAR 900,000 plus VAT. No separate accounting entry is needed for the discount.