Accountancy Mathematics: Cash Discount (Part 1 of 3)

August 12th, 2006 Comments off
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As discussed in my earlier basic financial accounting article:

  • Cash discount is an allowance/reduction on the amount due by the customers when they pay their bills within a stipulated period of time;
  • This is to encourage prompt payment of bills;
  • The credit terms which comprise the cash discount rate and the credit period are shown in the invoice;

This accountancy mathematic on Cash discount article is of 3 parts:

  • Discuss Cash discount based on ordinary dating. Other datings like end-of-month dating, receipts of goods dating and extra dating is not discussed;
  • Using borrowing to pay to take advantage of Cash discount and
  • Lastly taking advantage partly of cash discount as we can only pay part of the invoices outstanding.
Explanation of The Mechanism Of Cash Discount:(a) 2/10, 1/30 , n/60

(b) Net 30

(a) 2/10,1/30 ,n/60

2/10 means 2% of the net price may be deducted if the invoice is paid within 10 days of the date of the invoice

1/30 means 1% of the net price may be deducted if the invoice is paid within 11th and 30th day and

n/60 means that the full amount must be paid by the 60 th day.

After the 60 th day, the bill is overdue.

(b) Net 30

Net 30 means payment is due within 30 days of the invoice date.

ILLUSTRATION 1

An invoice dated 2 January 2006 for $6,000 was offered cash discount terms of 1/10,n/30.

If the invoice was paid on 10 th January 2006, what was the payment after Cash discount?

Solution:

As the invoice was paid 8 days after the date of the invoice ie within the discount period, the buyer is entitled to the 1% cash discount

Cash discount simply is Discount x Amount due

Cash discount =0.01 x $6,000 = $60

Payment to supplier is:

Invoice amount less Cash discount

=$6,000-$60

=$5,940

ILLUSTRATION 2:

An invoice dated 10 January 2006 for $6,000 was offered cash discount terms of 3/10, 2/20,n/60

If the invoice was paid on 28 th January 2006, what was the payment after Cash discount?

Solution:

As the invoice was paid 18 days after the date of the invoice a cash discount of 2% is obtained. The buyer did not get the 3% cash discount as the invoice was not paid within the 3% discount period of 10 days.

Cash discount =0.02 x $6,000 = $120

Payment to supplier is:

Invoice amount less Cash discount

=$6,000-$120

=$5,880

 

ILLUSTRATION 3:

An invoice of $6,000 was offered cash discount terms of 3/10, n/30 which INCLUDES A PREPAID TRANSPORT CHARGES of $100

What is the amount needed to pay the invoice within the Cash discount period

Solution:

Total amount in invoice = $6,000

Less:Transport charges = ($100)

Entitled for Cash Discount =$5,900

Cash discount 3% x 5,900 =$(177)

________

$5,723

Add back: Tranport charges $ 100

Amount to be paid $5,823

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Financial Accounting

 
 

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