Cash Discount: Definition, Formula & Example

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Cash Equivalents: Definition & Examples

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 Definition of Cash Discount
  • 0:39 Formula
  • 1:11 Examples
  • 2:12 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay

Recommended Lessons and Courses for You

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.

Formula

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.

Examples

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.

Let's try another one:

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Free 5-day trial

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create an account
Support