SHAMSA KIRAN Account payable Accounts payable is an entity's short-term obligation to pay suppliers for products and services, which the entity purchased on credit Accounts payable are the major source of unsecured short-term financing for business firms. The firms goal is to pay as slowly as possible without damaging its credit rating
Cash Discount Businesses frequently offer cash discounts as a way to encourage their business customers to pay their invoice early To encourage on time payment, companies offer an incentive of a cash discount if the invoice is paid within a specified period. 2/10 n/30 means take a 2% cash discount if paid within 10 days; pay the net price if covered within 30 days.
Cash Discount = Invoice Price Rate of Cash Discount Use the complement to find the net amount of an invoice An invoice of $10,000 which reads 2/10 n/30 tells you that a discount of 2% is available if the payment is made within 10 days. To calculate the net amount directly, use the complement of the discount (in this case, 0.98) and multiply it by the total amount. $10,000 x 0.98 = $9800 = net amount to be paid Effective Rate of Interest
= (Cash discount/Amount of money used) X (Days in the accounting year/ Net days Discount days) X 100 = ($200/$9800) x( 365/30 10) x 100 = (0.0204) x 18.25 X 100 = 37.23 % Example ABC Lmtd. received a $1,248 bill for computer supplies dated September 2 with sales terms of 2/10, 1/15, n/30. A 5% penalty is charged after 30 days. Find the amount due for the following dates: September 12, September 15, October 1, October 3.
September 12 (2% discount) = $1,223.04 September 15 (1% discount) = $1,235.52 October 1 (no discount) = $1,248.00 October 3 (5% penalty) = $1,310.40 Copyright 2009 Pearson Prentice Hall. All rights reserved. 15-8 Giving Up the Cash Discount Figure 15.1 Payment Options Trade discount Trade discount: the amount of discount that the wholesaler or retailer receives off the list price or the difference between the list price and the net price Net price: the price the manufacturer or retailer pays or the list price minus the trade discount.
Discount rate: a percent of the list price.
Look at this example Trade discount = rate x list price Find the trade discount for a cd player that retails at $120 and has a trade discount rate of 35%.
Trade discount = 0.35 x $120 Trade discount = $42 What does the $42 mean? That the wholesaler or retailer will not pay $42 of the $120 list price. Example Find the net price of a desk that lists for $320 and has a trade discount of 30%.
Trade discount = 0.30 x $320 = $96
Net price = List price Trade discount
Net price = $320 - $96 = $224 Trade discount series step by step An item lists for $400 and has a discount of 30%. $300 x 0.3 = $90; $400 - $90 = $210 An additional discount of 20% is taken on the previous price. $210 x 0.2 = $42; $210 - $42 = $168 An additional discount of 10% is taken on the previous price. $168 x 0.1 = $16.80; $168 - $16.80 = $151.20 $151.20 is the final price Find the net price Using the complement of the single trade discount rate.
Examples: The complement=1- 0.3=0.7 The complement=1- 0.2=0.8 The complement=1- 0.1=0.9 Example Find the net price of an order with a list price of $300 and a trade discount series of 30/20/10 Find the complement of each of the trade discount rates. They are 0.70, 0.80 and 0.90. Multiply them together.(0.7 x 0.8 x 0.9) The net decimal equivalent is 0.504 Apply the net decimal equivalent to the list price. Invoice Price = 300 x 0.504 = $151.20 Quantity Discount A price offered to buyers for placing large orders. Offer discount to customers who purchase items in large quantities. It may be one time discount or cumulative discount.
Quantity Discount Item number Quantity Unit cost 10010 1-99 $15.00 100-499 14.50 500-999 14.00