Sage 200 Insights: Correcting Settlement Discount Posted in the Purchase Ledger

Sage 200 Insights: Correcting Settlement Discount Posted in the Purchase Ledger

Cash discounts are deductions allowed by some sellers of goods, or by some providers of services, to motivate customers to pay their bills within a specified time. The sellers and providers offering a cash discount will refer to it as asales discount, and the buyer will refer to the same discount as a purchase discount. If the merchandise you purchase is for inventory, you might need to make an additional entry. Your inventory value should be the net cost; typically, this is the cost of the merchandise and freight, less your cash discount.

What is an early payment discount?

To illustrate, suppose you make a $3,000 purchase from a vendor offering a 2 percent discount if you pay the invoice within 10 days. The discount would be $60; subtracting the discount from the invoice amount yields a net of $2,940. Your entry would be a debit to purchases of $2,940 and a credit to accounts payable for $2,940. If you pay the invoice according to terms, you would then debit accounts payable for $2,940 and credit cash for the same amount.

What is early payment discount?

Therefore, you might need to adjust your inventory cost to reflect the discount. You record the purchase by debiting your inventory account $10,000 and crediting accounts payable $10,000. As you sell the merchandise, you credit inventory and debit cost of goods sold for the amount equivalent to the number of units sold.

Early payment discount example

You can choose between two methods to record these accounts payable discounts. This is a fairly high interest rate, and on discount terms that are not especially high. Consequently, offering a cash discount is not always a good idea for the seller, unless it is severely short of cash. To make matters worse, some buyers pay late and still take the discount, so that the seller ends up offering an even higher implied interest rate. This can cause continual dickering between the parties, if the seller takes the position that the buyer did not take the discount under the terms offered on the invoice.

However, if you do not pay by the discount date, you need to remit $3,000. Credit cash for $3,000, debit accounts payable for $2,940 and debit lost purchase discounts for $60. Suppliers may offer you a discount for paying early or within terms. For example, a vendor might allow you 30 days to pay the invoice in full but offer a 1.5 percent discount if you pay the invoice within 10 days. However, if you own a small business, you might want to take advantage of such discounts to improve your profits.

They provide electricity to a space and wait for payment from their customers. Assume that a company is in an industry where it is necessary to give customers invoice payment terms of net 30 days. If the company sells $10,000 of goods to a customer with those terms, the company will debit Accounts Receivable for $10,0000 and will credit Sales for $10,000. When the company receives the $10,000 from the customer, the company will debit Cash for $10,000 and will credit Accounts Receivable for $10,000.

If the customer does not pay within 15 days, then the invoice is due in 30 days with no discount. This type of early payment discount can be used to reward those customers who have consistently paid on time under the 1/10 – net 30 prompt payment terms. Like QuickBooks, you can create early payment discounts in FreshBooks. You can customize payment terms and apply them to all customers or select specific customers. When you create an invoice for a customer, the payment terms will automatically populate based on the initial setup.

If the invoice is not paid within 15 days, then it is due in 30 days with no discount. Similar to the 2/10 – net 30 early payment discounts, this type of early payment discount is ideal for jobs that require you to spend a large amount of cash up front. DateAccountNotesDebitCreditXX/XX/XXXXCashSale to customerXAccounts ReceivableXHowever, early payment discount accounting requires you to add another account to record the money your business is “losing” for the sale discount. If you offer credit to your customers, you likely send an invoice that shows when payments are due, how to pay them, and more.

Most companies allow for a portion of their sales to be on credit. Often, a business offers this credit to frequent or special customers who receive periodic invoices. This allows customers to avoid having to make payments as each transaction occurs. Other business routinely offers all their clients the ability to pay after receiving the service. An electricity company is an example of a company with accounts receivable.

  • Most companies allow for a portion of their sales to be on credit.

However, you can change the payment terms for specific invoices if they differ from the standard payment terms for a customer. QuickBooks makes it easy to create invoices that include early payment discounts. You can save different payment terms for each customer, so they’ll auto-populate when you draft an invoice.

In general, early payment discounts are suppose to be paid within a short period of time (i.e. 10 days of the invoice date). Early payment discounts are usually a win-win for vendors and their customers. Next time you issue or receive an invoice, consider proposing or requesting an early payment discount. If you still need an accounting software solution, then check out our best accounting software guide to see why we recommend using QuickBooks. This means the customer receives a 1% cash discount if payment is submitted within 15 days.

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By creating payment terms for each customer, QuickBooks can alert you when a customer’s invoice is coming due. With this information, you can send customers a friendly payment reminder which can incentivize them to make the payment prior to the due date. This means the customer receives a 2% cash discount if the invoice is paid within 15 days.

If your customer has a credit balance then you need to inform them so that they can take the credit against a future invoice. You should email them a copy of the credit memo and that way they can reference it along with their payment.

How do I record an early payment discount?

You must first record the sale you made to the customer by debiting Accounts Receivable and crediting Inventory. You offer an early payment discount of 4% if the customer can pay within 15 days (4/15, Net 30). The customer pays within 15 days, and you must record the transaction in your books.

The result may be disputed invoices that remain on the seller’s books for quite some time. This is also an added cost of doing business with a customer which should be considered when deciding whether the customer is sufficiently profitable. Prompt payment discounts (also known as settlement or cash discounts) are offered to credit customers to encourage prompt payment of their account. It is not guaranteed that customers will take advantage of prompt payment discounts at the point of sale as it is dependent upon whether or not credit customer pays within the settlement window.

Batching the payments to vendors

Your supplier offers a 2 percent discount if paid by the 10th, which would save you $200. You debit accounts payable for $10,000, credit cash for $9,800 and credit purchase discounts for $9,800. You must credit your inventory account for $200 and debit your cost of goods sold account for $200. You might prefer to record your purchases as the invoice amount, less the discount, which yields the net purchase amount. Under this method, you would record any lost discounts in a separate account.

The balance of money due to a business for goods or services provided or used but not yet paid for by customers is known as Accounts Receivable. These are goods and services delivered by a business on credit to their customer with an understanding that payment will come at a later date. In a B2B environment, cash discounts are used to stimulate instant payments of the products or services purchased. Trade discounts, on the other hand, are included in the list price of goods or services to encourage high-volume sales. This reduction in price is offered to all customers at the time of purchase.

If used properly, cash discounts can improve a business’s cash conversion cycle (CCC). The cash conversion cycle is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flow from sales. The CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash. The metric includes the amount of time needed to sell inventory, collect receivables, and the length of a company’s bill payment window before the company begins to incur penalties.