Cash discount (Skonto) is a percentage price reduction on an invoice granted to the buyer for payment within a specified period. A cash discount acts as a payment incentive and affects both VAT and commercial and tax accounting.
What is a cash discount and what legal framework applies?
A cash discount is not a rebate in the sense of a permanent price reduction, but a payment-related concession. Common invoice phrasing is, for example: “2% cash discount if paid within 10 days, net 30 days”. The following legal provisions are particularly relevant:
- VAT law: Changes to the tax base due to cash discounts lead to VAT adjustments; relevant regulations include §14 UStG (invoice requirements) and the correction provisions under §17 UStG.
- Commercial and tax law: Under the HGB and EStG, cash discount postings must be recorded correctly for commercial-law purposes, as they affect profit.
Accounting treatment of cash discounts
The usual approach is to post the full invoice amount (gross) and record the cash discount later when payment is made. Crucial is the correct adjustment of VAT / input VAT.
For the buyer (taking the cash discount)
Example: Purchase EUR 10,000 net, 19% VAT = EUR 11,900 gross. Payment term: 30 days, 2% cash discount if paid within 10 days.
- Initial posting:
- Inventory EUR 10,000
- Input VAT EUR 1,900
- to Accounts payable EUR 11,900
- Payment using the 2% cash discount (discount on net EUR 200, VAT correction EUR 38):
- Accounts payable EUR 11,900 to Bank EUR 11,662, Input VAT EUR 38, Discount received EUR 200
The input VAT must be corrected in the VAT return for the period.
For the seller (granting the cash discount)
Corresponding to the example above, the initial posting for the seller would be:
- Accounts receivable EUR 11,900 to Sales revenue EUR 10,000, VAT EUR 1,900
On payment with the cash discount:
- Bank EUR 11,662, Discount allowed EUR 200, VAT EUR 38 to Accounts receivable EUR 11,900
The reduced VAT must be taken into account in the VAT return for the period. A separate credit note is normally not required as long as the posting is properly documented.
Practical examples, impacts and calculations
Cash discounts affect liquidity, financing costs and tax results. Here are some concrete aspects:
- Effective interest: Cash discounts can be very attractive: 2% discount for paying 20 days earlier corresponds approximately to an annual effective interest rate of about 36.7% ((0.02/0.98)*(360/20)). For freelancers and small businesses this is an important decision factor: borrowing to take the discount often pays off.
- Cash flow: In the short term a cash discount reduces cash outflow; in the long term it can reduce DSO and relieve the credit line.
- Financial reporting: Discount income does not automatically reduce acquisition or production costs of assets; for goods it results in lower purchase costs, which must be recorded correctly under the HGB.
Practical tip: Document cash discount agreements in your terms and conditions or on the invoice and ensure your accounting software automatically adjusts VAT / input VAT when payments are posted.
Notes for freelancers and small businesses
Some pragmatic recommendations for small businesses:
- Before using a cash discount, check whether financing costs (e.g., overdraft interest) are lower than the effective yield of the discount.
- Use standardized accounts such as Discount received and Discount allowed to keep clarity in the profit and loss account.
- Ensure correct VAT adjustments in the VAT return; incorrect entries can lead to additional tax payments and possibly interest.
- In complex cases (e.g., part payments, returns, credit notes) consult your tax advisor, particularly regarding the VAT correction under §17 UStG.
A cash discount is an effective tool for payment management. Properly recorded and tax-considered, it improves liquidity and can lead to tangible cost advantages.