Cash Discount: Definition, Formula & Example

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  • 0:01 Definition of Cash Discount
  • 0:39 Formula
  • 1:11 Examples
  • 2:12 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Sometimes you can get a cheaper price for a product if you pay cash up front. In this lesson, you'll learn about the cash discount and its formula, and you will find some examples of ways in which it is used. A short quiz follows the lesson.

Definition of Cash Discount

A cash discount is a reduction in the price paid for a product or service if you pay with cash immediately or within a certain specified period of time. While it is used in consumer transactions, it shows up with much greater frequency in commercial transactions.

Why would a business give a cash discount? Businesses will utilize cash discounts to get paid quicker or to ensure payment in the case of discounts for immediate cash payments. A cash discount will also enable a business to avoid credit card processing fees charged to the business for processing credit charges.


You really can't get a simpler formula than a cash discount. Here it is:

Cash discount = purchase price * discount rate

The discount rate may be expressed as either a percentage or a decimal number. For example, the discount rate can be expressed as either 2% or .02. The formula can be expressed algebraically as CD = P*R where CD = the cash discount, P = the price, and R = the discount rate expressed as a decimal.


Let's take a look at some examples of cash discounts:

You just purchased a computer for $1,250. You can finance it over 12 months or the store will give you a 3% cash discount if you pay for the computer immediately with cash. What is the value of the discount?

CD = P*R

CD = ($1,250) * (0.03)

CD = $37.50

You'll save $37.50 if you pay immediately with cash.

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