Discounting

“ Discounsel, dis-kown′sel, v.t. (Spens.) to dissuade. [O. Fr. desconseillier—des, apart, and conseillier, to counsel.]
Discount, dis′kownt, n. a sum taken from the reckoning: a sum returned to the payer of an account: a deduction made for interest in advancing money on a bill.—v.t. Discount′, to allow discount: to advance money on, deducting discount: to put a reduced value on, as in an extravagant statement or fabulous story.—v.i. to practise discounting.—adj. Discount′able.—ns. Dis′count-brok′er, one who cashes notes or bills of exchange at a discount ”

“ Instead of getting discounts that add to their profits, they are constantly suffering discounts of the other kind; and, too often, these, and the accumulating stock of unsaleable goods—the consequence of credit temptations in purchasing—reduce the fifteen per cent. you speak of down to ten, and even five per cent. A large business makes large store-expenses; and these eat away a serious amount of small profits on large sales. Better sell twenty thousand dollars' worth of goods at twenty per cent. profit, than eighty thousand at five per cent. ”

“ If the discount exceeds such costs, it cannot be justified as a functional discount, particularly where, as here, the excess has a negative effect on competition.↑ In their brief filed as amici curiae, the United States and the Federal Trade Commission suggest the following definition of "functional discount," which is adequate for our discussion: "A functional discount is one given to a purchaser based on its role in the supplier's distributive system, reflecting, at least in a generalized sense, the services performed by the purchaser for the supplier." ”

“ The usual method by which money is loaned in the great [Pg 138] industrial centers is called discount, which is the exchange of a certain sum of money for a note or other credit paper of a larger amount, the interest thus being taken out in advance. Much borrowing in the form of discount is for the same purpose as other borrowing—to acquire control of more productive agents, to embark on new enterprises. The peculiarity of the discount money-market is that an unusual number of loans are made to meet contracts that have already been made. ”

“ We buy with the understanding that we are to realize what we pay in goods. As I have said, sometimes for a certain article, or in a good market, a good deal more may be realized; but then we have the risk of loss, and we have a heavy discount; and therefore we have to live by the profit on the goods we sell. If we were to pay in cash, then of course we must buy at a lower rate, so as to give us some profit on the shawl, and consequently if a woman were to come in with a shawl, and to agree that the price was to be 20s. ”

“ When the discount has ceased to exist through its absorption against premium on stock or the general surplus, it should no longer be reported because it is then a matter of ancient history with which the present is not concerned. ”

“ Inasmuch as the sale or purchase, under this method, must be booked on a cash option basis, this treatment seems to result in a departure from true cost or in the mistake of booking only some of the elements which enter into the cost of merchandise. The price at which a merchant can sell his product must include all direct and indirect costs and provide a margin for profit. The sales discount offered is simply one of these indirect costs. It cannot be more accurately estimated than can the salesman’s salary which is a part of the sale price. ”

“ The evil effects of such convulsions of the discount rate can hardly be exaggerated.129 In an economy in which almost every business man must rely, at certain seasons if not all the year round, on borrowed capital, the margin of profit may be wiped out by a sudden rise or augmented by a sudden fall in the rate of discount leading to under-trading or over-trading. Such fluctuations increase business risks, lead to higher business expenses and a greater cost to the consumer. ”

“ On the one hand, it recognizes that the quantity discount may be utilized arbitrarily and without justification in savings effected by quantity sales, to give a discriminatory advantage to large buyers over small ones. ”

“ Consequently, on either of these two theories, cash discount would have to be shown in the trading section of the profit and loss statement, in the one case as a direct deduction from sales, in the other as a selling cost.
Correct Method of Showing Cash Discount.—Other accountants maintain that cash discount is a financial management item; that a manager, in order to secure ready funds with which to take advantage of the discounts offered him on his own purchases, extends to his customers sufficient inducement to secure the early and prompt payment of their bills. ”

“ Accordingly each individual will submit to a sacrifice in order to sell his bills before the demand for them is exhausted and a discount is established; but the discount will not be greater than the estimate which the seller makes of the sacrifices which have been pointed out. The case may be briefly stated in figures, taking an instance from two commercial centres where the premium or discount paid on bills between them is not hidden or rendered more complicated by differences of currency, and where accordingly the par value is immediately plain. ”

“ DISCOUNT, in commerce, a term employed by traders, merchants, and bankers; especially by the two former, when they purchase commodities on the usual time of credit, and on condition that the seller allow the buyer a certain discount at the rate of so much per cent. per annum, for the time during which credit is generally given; provided the buyer pay ready money for such commodities, instead of taking the usual time of credit. ”

“ Because if you did give the cash discount yourself it would be so trifling that the people would not realize it was of any advantage to them. If somebody comes in and spends a dollar with you, and you give them two cents discount, what is it to them? It is nothing at all! But if you give them trading stamps, those have a real value in their eyes. ”

“ Riggs' apparent acceptance of it as the final word on discounts, one may ask if it recognizes all the elements necessarily involved in a discussion of the problems raised by discount financiering. From the literature of the subject one may read the following claims: Discount is a measure of the risk involved in a new enterprise; discount is a market adjustment that reflects the current value of money; discount is a sacrifice of principal for a slightly reduced interest annuity; discount is a dividend declared before the dividend is earned ”

“ A favorite method of charging the discount on stock to organization expense is not approved, not because it is a misnomer, for discount may well be looked upon as one of the expenses of organization, but because it is an item of sufficient importance and interest to require separate record. Charging the discount to some asset account, when payment of stock is made by property instead of by cash, is to be severely condemned. Inflation of asset values to cover up such an item cannot be justified. ”

“ The employees may have to stand a good round discount to some store-keeper or tradesman in order to secure their money. The best and most satisfactory return for services can be nothing less than solid cash; it encourages better attention to business and relieves the men from possible annoyance and inconvenience. ”

“ The rate of discount for trade bills is usually 1/2 per cent. per annum higher than the rate for bank bills.
The essential feature of almost all the bills on the market is that they represent a commercial transaction, such as a sale of goods, where value passes. It is this that lends them their self-liquidating quality; for they are usually liquidated by the acceptor out of the proceeds of the resale of the goods during the currency of the bill. ”

“ As regards the income from purchase discount, the effect of entering the voucher net is to bring onto the books the purchase discount income as soon as the voucher is entered. Purchase discount is not usually looked upon as earned until payment of the bill is made and thus the right to the discount established. This method then necessitates at the close of the fiscal period an adjustment of the difference between the Discount columns in voucher register and cash book, in order to defer to the next period the discount not yet earned on all vouchers unpaid at the close of the period. ”

“ It seems to me that a discount which gives a lowered cost to so large a proportion of respondent's customers and is withheld only from those whose conditions of delivery obviously impose greater handling costs, does not permit the same inferences of effect on competition as the quota discounts which reduce costs to the few only and that on a basis which ultimately is their size. ”

“ What is not sold during the year becomes a remnant which is disposed of at a discount. Certain styles are not to the taste of the public, and are left to be sold at half price. All of the advances and losses must be covered by the total of sales, or the ruined manufacturer will have to cease producing. ”

“ To the existence of banks of discount for cash, as on the continent of Europe, there can be no objection, because there can be no danger of abuse, and they are a convenience both to merchants and individuals. I think they should even be encouraged, by allowing them a larger than legal, interest on short discounts, and tapering thence, in proportion as the term of discount is lengthened, down to legal interest on those of a year or more. ”

“ It is usually pretty good business sense to take advantage of trade discounts. Do you not think we could make better bargains with our men if we did not wait to pay them until we are six weeks in arrears? ”

“ Do you believe, that, if any person had notes which insured to him the payment of all the Government demands upon himself, though he had no demands upon him directly, he would not find numbers of persons who would exchange those notes for him at a premium or a discount?—Then you would have a certain proportion of the monetary system of the country circulating at a discount. ”

“ Said the merchant, “Pluck out thine eye, and I will pluck out mine: then we will weigh them, and if they are equal in weight, I will acknowledge thy truth, and pay thee the price of thine eye; but, if they differ, thou liest and I will sue thee for the price of mine eye.” Quoth the one-eyed man, “Grant me time;” but the merchant answered, saying, “I am a stranger and grant time to none, nor will I part from thee till thou pay.” So the sharper ransomed his eye by paying him an hundred ducats and went away. Last of all came the buyer of the chanders-wood and said, “Take the price of thy ware.” ”

“ In the State of New York the stock of a corporation cannot be sold below par. Where sale below par is allowed, the proper booking of the discount requires consideration. The Interstate Commerce Commission requires that discounts or premiums be shown on the books under those titles, i.e., Discount on Capital Stock and Premium on Capital Stock. This method is to be commended as being true to fact and presenting a full and sufficient record of the facts. ”

“ Shniderman, 60 Harv.L.Rev., at 599-600 (Commission's approach to functional discounts "may have been influenced by the possibility of subtle price discriminating techniques through the employment of wholesalers receiving more than ample discount differentials") .↑ "In practice, the competitive effects requirement permits a supplier to quote different prices between different distributor classes-so long as those who are higher up (nearer the supplier) on the distribution ladder pay less than those who are further down (nearer the consumer) ." ”

“ In most industries there is need for larger capital at the seasons when the product is put upon the market. The merchant or manufacturer plans his business in the expectation of an average rate of discount at such times, and if it chances that the discount rates are abnormally high, he has no choice but to go on borrowing and paying the high interest out of the expected profits of his business. ”

“ But suppose the sale is concluded, and one of these lines is given for the balance, do you then understand that the whole sum due is to be taken in goods?-Yes. The reason why I expect to get the shawl for a little less if large part of the price is wanted in money, is because I never consider that I realize above what I pay in goods for my hosiery, and very often there is a heavy discount off. ”

“ Cash Discounts Analyzed.—Sales and purchase discounts are another class of transactions best handled through the cash book, although, strictly speaking, they are not cash transactions. When a customer buys goods on account, he is usually offered two bases of settlement, depending on the length of the credit term allowed. ”

“ There are some singular discounts allowed in the book trade. They were happily illustrated on one occasion by Mark Twain. One day while the humorist was connected with a publishing house he went into a book store and picking up a volume asked the price. He then suggested that as a publisher he was entitled to 50 per cent discount. To this the clerk assented.
“As I am also an author,” said Mark, “it would appear that I am again entitled to 50 per cent discount.” ”

“ In some articles a discount of five per cent. is allowed in London, and other large cities; and those who thus pay are usually best served. Under the idea of buying cheap, many people go to new shops; but it is safest to deal with people of established credit, who do not dispose of bad goods by underselling. ”

“ We generally agree with this description of the legal status of functional discounts. A supplier need not satisfy the rigorous requirements of the cost justification defense in order to prove that a particular functional discount is reasonable and accordingly did not cause any substantial lessening of competition between a wholesaler's customers and the supplier's direct customers. ”