Differences between Discounts and Rebates

Discounts

A rebate is a refund or return on the purchase of goods or services. A rebate is returned to the customer after the amount on the purchase has been paid in full. The rebate can be used as an incentive to buy more than one item at a time.

The discounted price is visible as of the precise moment that the purchase would have been made and therefore offers immediate gratification. A Trade Discount is a reduction in price between a manufacturer and a retailer on high volume purchases from a stock or supply list. The higher the volume of trade the larger the discount may be.

The high-volume trader may receive a discount of 40% for example while a medium volume trader may only be given 30% reduction in his purchases. The cash discount on the other hand is between the seller or retailer and the buyer.  It is a cash amount deducted from a purchase.

This discount is often referred to as a sales discount because it is between the retail seller and the buyer. The retailer puts the discount on after goods have been purchased from a wholesaler. Discounts are granted to all customers to increase sales.

Features:

  • It happens on a single purchase.
  • Unconditional, to be given to a customer on account of massive purchase by one single billing from the price List (Base price).
  • Discount is given on every good purchased by the customer
  • Discount doesn’t depend upon the turnover, and it is fixed and can only differ from customer to customer.

Advantages:

  • It results in extra satisfaction because as a customer when you go to shopping and in your mind, you have a certain price which you expect for a product and if you get the product at the lesser price than naturally you will be happy and feel more satisfied.
  • The first and foremost advantage is that it results in extra saving for the consumer, so for example if you want to buy a trouser which cost around Rs. 20 but due to some promotional scheme by shopkeeper you get 20 percent discount than you get the same trouser at Rs. 16 then this Rs. 4 is savings which happened due to discount.
  • Discounts are advantageous to shopkeepers also because by offering discounts they are able to attract customers to their shops resulting in more footfalls and hence are able to sell their dead stock which was lying with them resulting in locking of working capital.

Disadvantages/Cons:

  • Another cons of discount is that shopkeepers usually increase the price of the product and then offer a discount on increased price which means that customer does not get any benefit from the discount.
  • The biggest cons of discounts are that shopkeepers exploit the mentality of customers towards discounts to their advantage by offering outdated and defective products during the discount sale and hence it is the customers who feel cheated or exploited after purchasing discounted products.

Rebates

A rebate is a form of buying discount and is an amount paid by way of reduction, return, or refund that is paid retrospectively. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales. Rebates are also used as a means of enticing price-sensitive consumers into purchasing a product. The mail-in rebate (MIR) is the most common. A MIR entitles the buyer to mail in a coupon, receipt, and barcode in order to receive a check for a particular amount, depending on the particular product, time, and often place of purchase. Rebates are offered by either the retailer or the product manufacturer. Large stores often work in conjunction with manufacturers, usually requiring two or sometimes three separate rebates for each item, and sometimes are valid only at a single store. Rebate forms and special receipts are sometimes printed by the cash register at time of purchase on a separate receipt or available online for download. In some cases, the rebate may be available immediately, in which case it is referred to as an instant rebate. Some rebate programs offer several payout options to consumers, including a paper check, a prepaid card that can be spent immediately without a trip to the bank, or even as a PayPal payout.

Features:

  • An incentive to be given to a customer clubbed with qty purchased by a customer within the period specified (say one month)-conditional.
  • Is retroactive agreement.it is given to a partial payment to the particular scheduled time. (1yr or 3 Yr).
  • Discount on turnover, means if you buy three shirts, you will get a discount of 20%, whereas if the no. of shirts has reduced the discount will get reduced.

Advantages

  • Sales discounts result in early payments that support the liquidity position of the seller.
  • The customers can buy the goods at slightly lower prices.
  • It results in a reduction of outstanding accounts receivable.

Disadvantages

  • If the cost of funds for the early payment is higher than the sales discount, the buyer will effectively lose money on the transaction.
  • The seller has to bear the brunt of lower revenue due to sales discounts. As such, sales discounts can also be seen as an extra cost for the seller.
  Discount Rebate
Definition Discount is the reduction offered by a seller to the buyer from the purchase price of goods or services. Rebate is refund or return of currency value that a seller of goods provides to the buyer for various different reasons.
Impact on Invoice Trade discount is reduced from the original value even before the invoice is generated. Cash discount, on the other hand, is reduced from the final invoice value. The amount of rebate does not affect the original invoice as the adjustment is made post-sale. The effect is shown in trading account & the income statement.
Consideration Trade discount is provided considering the quantity bought. Cash discount is provided considering the time of payment. Rebate is provided considering all the reasons for which a trade discount or cash discount is not offered.
Type of Transaction Trade discount is offered both on cash and credit sale, however, cash discount is only offered on a prompt payment. Rebate is allowed on both cash and credit sales.
Timing It is applied at the time of occurrence of an event i.e. before the sale or purchase has been completed. It is used after an event has been recorded i.e. post the sale or purchase has been completed.
Recording in book of accounts In case of a trade discount, it is not shown in the books of accounts whereas a cash discount is recorded in the income statement as an expense. It is shown separately in the financial statements as it is provided after the sale has already been recorded.
Reasons To promote high quantity purchases, receive timely payments, and increased sales. For various reasons which are unfavourable during the purchase cycle, such as; poor quality, delay in delivery, etc.

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