Trade Discount - 2/10 in Accounting
In accounting, 2/10 typically refers to a trade discount offered by suppliers to their customers for early payment of an invoice. The "2" in "2/10" indicates that the customer will get a 2% discount on the price of the goods or services if they pay their invoice amount within 10 days of the invoice date. It is also used as a way for suppliers to improve their cash flow by receiving payment sooner rather than later.
If you offer your customers a 2/10 net 30 payment term, which means they can take a 2% discount on the invoice amount if they pay within 10 days of the invoice date. If the invoice is not paid within 10 days, then the full amount will be due within 30 days. "Net 30" means that the invoice is due in 30 days from the invoice date.
- Let's say you have issued an invoice for $1000 to a customer.
- The customer has the option to take a 2% discount on the total amount if they pay within 10 days of the invoice date. The discount could be $20 ($1000 x 2%).
- So, the total amount due if your customer pays within 10 days is $980 ($1000 - $20).
- If the customer does not pay the invoice within 10 days, the full invoice amount of $1000 is due 30 days after the invoice date.
2/10 Net 30 = Total Receivables – Total Discount
The difference between 2/10 net 30 and net 30 is that 2/10 net 30 offers early payment discounts, while net 30 does not.
- Reduced carrying costs: Businesses can reduce the costs associated with carrying inventory and accounts receivable.
- Increased sales: Offering an early payment discount may encourage customers to purchase more frequently or in larger quantities.
- Better budgeting and forecasting: Knowing when cash will be received can help businesses better budget planning and forecast future expenses.
- Reduced risk of bad debt: Businesses can reduce the risk of customers defaulting on their payments.
- Stronger relationships: Strengthen relationships with customers, can appreciate the opportunity to save money.
While there are many advantages to using 2/10 net 30 payment terms, there are also some potential disadvantages to consider:
- Reduced profit margins
- Increased administrative work
- Not be suitable for all businesses and for all types of customers