What is the term for a deduction that a vendor allows on the invoice amount to encourage prompt payment?

The term for a deduction that a vendor allows on the invoice amount to encourage prompt payment is known as a cash discount. This discount is typically offered to incentivize the buyer to pay their invoice sooner than the standard payment terms.

When a vendor provides a cash discount, it serves as a financial encouragement for timely payment — for example, a vendor may offer a 2% discount if the invoice is paid within 10 days rather than the full amount due in 30 days. This helps the vendor improve their cash flow and reduces the risk of delayed payments.

In contrast, other options do not accurately describe this concept. A sales discount typically refers to a reduction in the selling price to promote sales, often associated with sales events or promotions. A credit memorandum is a document issued to a buyer indicating that their account has been credited for returns or overpayments and is not specifically about payment incentives. Petty cash refers to a small amount of cash on hand used for minor expenditures and is unrelated to invoice payments or discounts. Thus, cash discount is the most appropriate term for the deduction aimed at encouraging early payment.