May 9, 2010

## 1. Explanation of 2/10, n/30 credit terms

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.

The term 2/10, n/30 is a typical credit term and means the following:

• "2" shows the discount percentage offered by the seller.
• "10" indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount.
• "n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.

The terms offered by the seller usually depend on the trade custom. Some variations of the cash discount terms, among others, may be "2/15, n/30" (2% discount for the payment within 15 days and the full amount to be paid within 30 days) or "n/10 EOM" (the invoice is due and payable 10 days after the end of the month in which the sale occurred).

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."

The buyer treats such a discount as a reduction of the cost and uses the account called "Purchases Discount" or "Discount on Purchases."

## 2. Accounting for cash (sales) discounts

Let's see how the credit term of 2/10, n/30 works in an example.

Michael & Co Ltd. ships \$1,000 of goods to a customer. If the customer pays Michael & Co Ltd. within 10 days of the invoice date, the customer is allowed to deduct \$20 (2% of \$1,000) from the purchase of \$1,000. In other words, the \$1,000 amount can be settled for \$980 if it is paid within the 10-day discount period.

In the situation when the buyer is paying the account payable to Michael & Co Ltd. for \$1,000 early enough to receive a 2% discount, the following entry is made by the buyer:

 Account Titles Debit Credit Accounts Payable 1,000 Purchases Discount 20 Cash 980

On the other hand, in the case when we are receiving payment from the Customer for a \$1,000 account receivable early enough to offer a 2% discount, the seller would make the following entry:

 Account Titles Debit Credit Cash 980 Sales Discount 20 Accounts Receivable 1,000

The method of recording the cash (sales) discounts is called the Gross Method.

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