What do you understand by the term “discounts and allowances”? Explain various types of discounts and allowances given by the manufacturer to various types of buyers with example.

Discounts and allowances are reductions to a basic price of goods or services.

They can occur anywhere in the distribution channel, modifying either the manufacturer's list price determined by the manufacturer and often printed on the package, the retail price set by the retailer and often attached to the product with a sticker, or the list price which is quoted to a potential buyer, usually in written form.

There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion. Many are price discrimination methods that allow the seller to capture some of the consumer surplus.

Types

The most common types of discounts and allowances are listed below.

Dealing with payment

Prompt payment discount

Trade discounts are deductions in price given by the wholesaler or manufacturer to the retailer at the list price or catalogue price. Cash discounts are reductions in price given to the debtor to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide cash flow to the firm. They are sometimes used as a promotional device.

Examples

• 2/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 2% discount if they pay within 10 days of the invoice date.

Preferred payment method discount

Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on credit card transactions.

Partial payment discount

Similar to the Trade discount, this is used when the seller wishes to improve cash flow or liquidity, but finds that the buyer typically is unable to meet the desired discount deadline. A partial discount for whatever payment the buyer makes helps the seller's cash flow partially.

Forward dating

This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward - example: purchase goods in November for sale during the December holiday season, _____ _____ ______ _____ ___ _____ ___ __________ _______ ______ ________ _________.
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