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In
accounting, a cash (sales) discount represents an expense to the seller. The
account used to recognize the expense may be called “Sales Discount” or
“Discount on Sales.” Indication “2/10, n/30” (or “2/10 net 30”) on an invoice represents a cash (sales)
discount provided by the seller to the buyer for prompt payment. 1/10, n/30—means a buyer who pays within 10 days following the invoice date may deduct a discount of 1% of the invoice price. If payment is not made within the discount period, the entire invoice price is due 30 days from the invoice date. The following table contains a number of standard payment terms, what they mean, and the effective annual interest rate being offered under these credit terms (if any).

• Cash discount forfeited is the account record in other income of the income statement.
• Thus, terms of “1/10” mean that a discount of 1% can be taken if payment is made within 10 days.
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  6.4Name two situations where cash would be remitted to a customer from a retailer after purchase.

When the credit terms are 1%/10 net 30, the net result becomes, in essence, an interest charge of 18.2% upon the failure to take the discount. Many systems will allow for each account to have subaccounts. Subaccounts allow for summarizing or combining amounts while also maintaining the detailed amounts. Let’s
see how the credit term of 2/10, n/30 works in an example.

What do 2/10, n/30 invoice terms mean?

The CEO of Company A faces decreasing sales due to fierce competition in the marketplace. The CEO believes that the reason sales are declining is due to the company not offering trade credits. In fact, Company A is the only company in the industry that does not offer trade credits to customers. Then Company A sets up a new trade credit term for customers – 2/10 net 30. Customers who purchase on credit are given 30 days to settle their obligation.

Net 30 refers to the amount owed in full, less any discounts and deductions. There are two accounting methods use to record the cash discount, it is a Net method and Gross Method. Please refer to the explanation and journal entry of both methods in the following sections. The 1%/10 net 30 calculation is a way of providing cash discounts on purchases.

Credit Terms Table

Although the numbers are always interchangeable across vendors, the standard structure for offering a payment discount is the same. This figure will indicate the total percentage discount on the invoice prior to shipping or taxes that may be discounted upon early payment. Net 30 terms is an example of credit terms used on an invoice. The term means that payment in full is due 30 days after the date of the invoice.

When companies offer trade credit, an allowance for doubtful accounts is set up to anticipate the amount of bad debts from credit purchases. Credit terms are the payment requirements stated on an invoice. It is fairly common for sellers to offer early payment terms to their customers in order to accelerate the flow of inbound cash.

What does the credit term 1/10 Net 60 mean?

The gross method of purchase discounts assumes the discount will not be taken and will only input the discount upon actual receipt of payment within the discount period. The biggest risk to a supplier when offering trade credit is the potential for bad debt. Since cash does not immediately switch hands in a purchase, the buyer may end up not paying for the purchases.

2/10 Net 30 refers to the trade credit offered to a customer for the sale of goods or services. 2/10 net 30 means that if the amount due is paid within 10 days, the customer will enjoy a 2% discount. When payment is received, the receivable will be credited in the amount of the payment and the difference will be a credit to discounts taken. For a discount of 1%/10 net 30, it is assumed the 1% discount will be taken. This results in a receivable being debited for 99% of the total cost. Company XYZ sells goods amount to $ 50,000 to one of the customers with credit term 4/10, net 30 days.

Credit terms of 1/10, n/30 mean that                …

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This is especially common for cash-strapped businesses, or those that have no backup line of credit to absorb any short-term cash shortfalls. Generally business around the world give some time of credit to make the payment to it customers. This time period allowed by the supplier is called credit period. If the customer takes advantage of the discount, the company will reduce its revenue in the income statement.

credit terms definition

Payment terms are imposed to ensure that payments are received by suppliers within a reasonable period of time. Thus, terms of “1/10” mean that a discount of 1% can be taken if payment is made within 10 days. Gross Method is the method that records full amount as revenue. If the customer pays early and enjoy the discount, the seller will reduce the revenue.

It means that if the bill is paid within 10 days, there is a 1% discount. 2/10, n/30 or 2/10, N 30 refer to the accounting term in which seller provides the cash discount to customers. This kind of discount accrued expenses terms will place on the issued invoice. It encourages the customers to pay the outstanding amount before the deadline. The net method records the receivables at the sale price less the cash discount.

Other examples of common settlement terms

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The credit you lend to your customer depends upon the creditworthiness of your customer. This could be based on the volume of transactions, the capacity of repayment, historical performance, etc. Here, the customer is allowed a time benefit and the seller expects the bill to be settled before the due date. Typically, the time limits are set before the transaction is made.