Welcome!
In this video, we discuss and solve problem involving cash discounts.
Cash discount are offered by businesses to encourage prompt or early payments of bills
or invoices.
The seller will provide a time period on the invoice within which discounts are allowed.
If the buyer pays within that period, the buyer gets the discount.
So, what’s the difference between Cash discount and Trade Discount?
Trade Discount is given on the List Price while cash discount is given on the net price.
Trade Discount is applied because the buyer makes a purchase irrespective of when they
pay while cash discount is applied because the buyer pays early, within a specified period.
Therefore, a cash discount is an incentive given to the buyer to pay early.
There are various presentations of cash discount terms and dating methods but we will focus
mainly on ordinary dating here.
Here is a common example: 2/10, n/30
This is read “two-ten, net-thirty” The 2/10 means that the buyer gets a 2% discount
if they pay within 10 days.
The n/30 means that the net price is due in 30 days.
After 30 days, the buyer might be assessed a late fee or an interest charge based on
agreed terms between the buyer and the seller.
Here’s another example: 5/10, 3/15, n/30
This means that 5% cash discount applies for payments made within the first 10 days, and
3% discount applies to payments made after 10 days but within 15 days, and whatever amount
remains unpaid of the net price after 15 days must be paid within 30 days.
After 30 days, a fee or penalty may apply.
Another dating approach is called End of Month dating or EOM.
This approach makes the payment terms effective on the last day of the month.
That is, you start counting from Day 1 of the following month.
In this case, 2/10, n/30 EOM means that the 2% discount will apply till the
10th day of the next month.
So, whether the invoice was issued on March 2 or March 22, the last date to take advantage
of the 2% discount is April 10th and the last day to fully pay the net price without penalty
is April 30th.
Another dating approach is Receipt of Goods or ROG approach.
This approach makes the payment terms effective on the date the goods are received.
That is, you start counting from the day after the goods are received.
If nothing is appended to the payment terms like EOM and ROG, then the terms apply from
the invoice date.
And like we saw before; we refer to that as ordinary dating.
Now, let’s now solve some ordinary dating problems.
A merchant received an invoice for $7800 dated March 29 2020, with payment terms
4/5, 2/15, n/30 And there’s a 1% late payment penalty per
month.
We want to determine the amount required to pay off the invoice on each of these dates.
Although, not required, but we can represent the payment terms in a timeline.
The 4% discount applies if payment is made within 5 days,
the 2% will apply after 5 days but no later than 15 days
and there’s no discount after 15 days.
The invoice date is March 29th.
For the 4% discount that applies within the first 5 days,
note that we start counting from the day after the invoice date, and, since March has 31
days, the five days will be March 30th, March 31st, April 1st, 2nd and
3rd.
Thus, the last date to take the 4% discount is April 3rd.
For the 2% discount, we have 15 days from March 29.
We can easily manually determine this date and we can also use the BA II Plus calculator.
On the BA II Plus calculator, press 2nd and the Number 1 button for date.
In Date 1, for March 29 2020, input 3.29 20, and ENTER.
And then scroll up twice for Days Between Dates and input 15, ENTER.
Then scroll up for Date 2, and press the CPT button to compute.
So, the last date to take the 2% discount is April 13th.
For 30 days after the invoice date, we can again scroll down to DBD input 30, ENTER,
and scroll up to Date 2, and compute.
So, the last date to pay without penalty which is also called Credit Period is April 28.
Now April 10th is between April 3rd and 13th, therefore, a 2% discount applies.
And the amount due will be 7800 minus 2%, which will be 7644.
A payment made on April 3rd falls on the last date to take the 4% discount so the amount
due will be 7800 minus 4% which gives 7488.
For April 20th which falls between 13th and 28th, no discount applies.
So, the net invoice amount of 7800 is due.
Lastly, since May 10th is beyond the credit period of April 28, the 1% penalty will apply
and the amount due will be 7800 plus 1%.
An that gives 7878.
And that’s it for this video.
Thanks for watching.