Question

Explain the rationale for offering a cash discount for payments made within a specified period of time as well as the accounting for such cost reductions.

Answer 1

Cash discount is often made by the company in order to increase the liquidity positions in its books of accounts and it is often made by the company in order to reduce the cash conversion cycle because cash discount will be attracting a lot of customers who were earlier addicted to the credit payments and those cash discounts will be included in order to gain the cash in the short run,and help the company through time value of money and it can also be helpful in increasing the liquidity in its books of accounts in the short run

the cost discounts which are in-form of the cash discounts will always be helpful because this will be leading to better realisation of the payment from the customers and this can also be implied that the company is trying to increase the overall liquidity in its hands and it can also be trying to reduce the recovery expenditure and their realisation costs on the part of the customers so it is trying to to minimise the risk associated with the realisation of the payments and it is also trying to increase the liquidity in its hands and these cash discounts are to be accounted into the books of accounts by reducing the overall sales price of the products.