Accounting and Finance Foundations

Unit 2

Accounting and Finance Foundations Unit 2: Accounting and Finance Math Workshop 143

Accounting and Finance Math Workshop

Lesson 5.6 Cash Discounts

Student Guide

Usually businesses sell to other businesses on account. This means the customer will be billed later for

purchases. The time a purchaser has to pay a bill, usually 30 to 90 days, is called the credit period.

Businesses frequently offer cash discounts as a way to encourage customers to pay their invoices early.

Cash discounts are figured from the total due amount on the sales invoice.

The most commonly used cash discounts are 2/10, n/30. This means that 2% may be deducted from the

invoice price if it is paid within 10 days of the invoice date. The full amount is due within 30 days.

Example

Determine the dates for discount and final due date. Credit terms 2/10, n/30;

Invoice date June 10.

Solution

2% discount if paid within 10 days. June 10 + 10 days = June 20.

Full amount due in 30 days. June 10 until June 30 = 20 days. 10 more days = July 10

as the due date.

*Always count out the 30 days due to months that contain more or less days.

Example

Determine the cash discount if the invoice is paid within 10 days. Credit terms 2/10, n30;

Invoice amount: $1,025.40.

Solution

.02 x $1,025.40 = $20.51 discount

$1,025.40 – $20.51 = $1,004.89 total due if paid within 10 days. Customer saved $20.51!

There is another way to look at this transaction: If the customer pays the bill within 10 days,

they are only required to pay 98% of the total amount due. $1,025.40 x 98% = $1,004.89

Chapter 5