Explanation:Most businesses, especially manufacturers, sell goods to other businesses on account. This means that a retailer can buy inventory from its supplier on the first of the month and not actually pay for the goods until the end of the month. This inventory is bought on account.Most businesses have credit terms for purchases on account of 2/10, n/30 or 2/10, net/30. These terms give the buyer an additional two percent discount if they pay for the goods in full in the first ten days after the order was placed. If the buyer doesn’t pay for the goods in the first ten days, the entire purchase price must be paid in 30 days.
Example:This 2 percent discount is good for the buyer and the seller. Since the buyer is receiving its inventory for 2 percent less, it can earn a 2 percent higher gross profit. The discount is good for the seller because it receives the cash from the transaction faster. In most businesses, cash flow is a problem. If companies can do something to improve their cash flow, it is usually worth it.
In a nutshell:
- Cash discounts are deductions that aim to motivate customers to pay their bills within a certain time frame.
- A cash discount gives a seller access to her cash sooner than if she didn't offer the discount.
- An example of a cash discount is a seller who offers a 2% discount on an invoice due in 30 days if the buyer pays within the first 10 days of receiving the invoice.