Accountancy Mathematics: Cash Discount (Part 3 of 3)

August 12th, 2006 Comments off
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This is the final part of Cash Discount which dealt with:

  • Taking Advantage Of Cash Discount on Partial Payment of Invoices

PARTIAL PAYMENT OF INVOICE & IMPACT ON CASH DISCOUNT

Very simply, if a buyer pays part of the invoice within the discount period, he can only be entitled for proportionate fraction of the Cash discount that is offered.

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 partly paid $$3,000 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 BUT THIS TIME he has only partly the amount owing ie $3,000 out of total amount of $6,000

Cash discount simply is Discount x Amount due

If he had made payment of $5,940 ($6,000-$60), he would have received the total Cash discount $60(0.01x$6,000)

As he has only partly ie $3,000

His proportionate fraction entitlement of the Cash discount:

=3,000/(6,000-60) x $60 =$30

Therefore, the amount still owing:

=$6,000-($3,000+$15)

= $2,985

ILLUSTRATION 2

On 20th January 2006, Mr A bought some goods at $100,000 with cash discount term 3/10,n/30.

To pay the invoice on 30 th January, she borrowed the money for 20 days at 10% per annum simple interest.

How much did she save by borrowing to take advantage of the discount?

Solution:

Cash discount = 3% x $100,000 =$3,000

Principal borrowed =$100,000 -$3,000 =$97,000

Credit period = 30 days – 10 days =20 days

Simple interest calculation:

Principal x interest x time (Prt)

=$100,000 x 10% x 20/360

= $555.56

Net amount saved = Cash Discount – Interest

= $3,000 -$555.56

= $2,444.44

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