What does 2/10, n/30 Mean?
2/10, n/30 or 2/10, N 30 refer to the accounting term in which seller provides the cash discount to customers. This kind of discount terms will place on the issued invoice. It encourages the customers to pay the outstanding amount before the deadline.
2/10, n/30 means that customers will receive 2% discount if they settle accounts receivable within 10 days after the invoice date. Customers have 30 days to settle the invoice, however, they will not receive discount if they pay after 10th day of invoice date.
Payment term mean: 2/10, n/30 or 2/10, N30
- “2”: the discount percentage if customers settle payment within discounted period.
- “10”: the discounted period in which seller provides the cash discount to the customers if payment is made within this period.
- “n/30 or N 30 or Net 30”: is the full credit term that supplier provides to the customers. The customer must make full payment within 30 days after invoice date.
Example
Company ABC purchases raw material from the supplier amount of $ 100,000 on 01 January. The supplier has provided credit term 3/10, n/30 to Company ABC due to the long-term relationship.
It means the company will receive 3% discount if we make full payment from 01-10 January. If the company unable to make full payment to eligible for the discount, we can delay the payment for 30 days. We can make payment from 01-30 January.
Journal Entry
There are two accounting methods use to record the cash discount, it is a Net method and Gross Method. Please refer to the explanation and journal entry of both methods in the following sections.
Net Method
This method seller will record only the net amount (total sale less discount) when the company recognizes revenue. Even the company not sure if the customer will make an early payment to claim the discount or not. If the customer pay after the discounted period, they will record additional other income. Please refer to the following journal:
- Initial recognition
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 000 | |
| Sales | 000 |
- If the customer pays within the discounted period:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accounts Receivable | 000 |
- If the customer pays after discounted period
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Cash discount forfeited | 000 | |
| Accounts Receivable | 000 |
Cash discount forfeited is the account record in other income of the income statement.
Gross Method
Gross Method is the method that records full amount as revenue. If the customer pays early and enjoy the discount, the seller will reduce the revenue. If the customer pay after the discounted period, they simply record cash and receivable.
- Initial recognition
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 000 | |
| Sales | 000 |
- If the customer pays within the discounted period:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Cash Discounted | 000 | |
| Accounts Receivable | 000 |
- If the customer pays after discounted period
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accounts Receivable | 000 |
Example of Net and Gross Method for Cash Discounted
Company XYZ sells goods amount to $ 50,000 to one of the customers with credit term 4/10, net 30 days. It means customer will receive 4% cash discount if settle within 10 days after invoice date. The company allows customers to owe for 30 days.
Discounted amount = $ 50,000 * 4% = $ 2,000
Please refer to the journal entry for both Net and Gross Method:
| Net Method | Gross Method |
|---|---|
| Initial record on the day of sale. | |
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| If customer settle invoice within 10 days, he needs to pay only $ 48,000 | |
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| If customer pay after 10th day, he must settle the full amount $ 50,000 | |
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