To ensure they are doing it properly, merchants who utilize the cash discount program and acquire a brick-and-mortar store are obligated to display signs by the entrance and in front of all locations consistent with point-of-sale. The customer’s receipt is required to have a clear display of based cost, total of sale, and cash discount visibly printed.
On invoices, they are also required for merchants who own an eCommerce store that requires manual payments. Cash discounts require an existing bill and must be explicitly stated in the “Terms & Conditions” section of the invoice. On invoices, cash discounts are displayed in the following format: 5/7, net 30. This means that the customer is entitled to receive a 5% discount only if the invoice is paid within seven days. The goal is to make the buyer submit payment before the due date. If they fail to make the time frame, the customer will have to pay the full balance within 30 days.
Example: If a customer pays $970 on a $1,000 invoice, the $30 difference is classified as a 30% discount due to the customer’s early payment. The merchant will record $970 debit to the cash account, $30 to the sales discounts expense account, and a credit of $1,000 to the receivable account.
As the cost of doing business increases, merchants are searching for flexible solutions that will reduce their expenses. Many have implemented varying cash discounts and surcharge programs to boost their bottom line. Merchants who offer a cash discount at their business increase their prices by a specific amount.
- When a customer is paying with a card — ring up the advertised price
- When a customer is paying with cash — apply a cash discount to their purchase
Surcharging is the adding of a fee to all purchases that are paid for with a credit card. Surcharging fees also cover a portion of a merchant’s processing fee. If surcharging is sustainable in your state, a business owner is liable to enact a policy of including a surcharge on all credit card services in your area.
However, there are limits on surcharge amounts. A few stipulations are as follows: transactions completed with a PIN, prepaid debit card, or signature cannot be surcharged. Additionally, merchants are required to hang signage that advises customers of the surcharge at the point of entry and sale.
Cash Discounting vs. Surcharging: What’s the Difference?
The main differences between cash discounting and surcharging:
Although cash discounting and surcharging share the same objective to reduce overall business expenses and cover a portion of credit card processing costs. Surcharging is a fee with preliminary negative connotations, and cash discounts are simply just a discount.
The benefits of cash discounting and surcharging programs are plentiful, including:
Lower Processing Fees:
The main objective of a cash discount is to save on payment processing costs. Merchant processing fees are present when paying with cash. This means an accumulation of significant savings for small businesses and merchants who have a lower dollar amount in transactions.
Reduction in Friendly Fraud:
Customers who pay with cash evidently won’t receive a credit card statement weeks after visiting the business. They are unlikely to initiate a chargeback on a purchase that they cognitively remember making.
Boost Repeat Business:
Cash discounts can promote repeat customers to purchase from the business continuously. When attracted by the deal of saving money when paying with cash, first-time patrons may be more inclined to be repeat customers and support the business. This creates loyal customers who appreciate that they will be offered a cash discount on their next visit. Obtaining repeat business is exceptionally beneficial for a business’s bottom line.
In 2019, data shows swipe fees for credit card transactions totaled 93 billion dollars in the United States (2.2% of credit card sales). For small merchants, transactions cost more: 3.1% online and 2.8% in stores. Merchants define this as “unseen money” when it comes time to add up their monthly bills.
If an interest rate is higher than a consumer will otherwise earn and there are sufficient funds to do so, a cash discount will be allocated to the customer. Customary terms of cash discounts imply an extremely high-interest rate, in which cash discounts tend to be more favorable towards the customer than the seller.
The formula for calculating interest on a cash account is:
Discount % divided by (100-discount%) X (360 divided by (Full allowed payment days-discount days))
How To Report the Discount
Merchants will report the amount of total sales discounts accumulated in an accounting period on their income statement.
For Example: If a small business had $300 in discounts during that period, the report will reflect as “Less: Sales Discounts $300.”