Per annum means yearly or annually. For example, if a business charges its customers 1.5% per month on any unpaid balance, the per annum rate is 18%. The per annum rate was the result of 1.5% X 12 months in a year.
When a supplier offers a credit customer an early-payment discount of 2% for paying an invoice in 10 days instead of paying the full amount in 30 days, the supplier is giving up 2% of the invoice amount in order to be paid 20 days early. To compute the rate per annum we multiply both the "2%" and the "20 days" by 18 (in order to get close to the 365 days in a year). Hence, the per annum rate is approximately 36%. To test this, let's assume that the invoice amount was $1,000 and the supplier states that the customer may deduct 36% per annum if the invoice is paid 20 days before the due date. The calculation will be $1,000 X 36% per annum X 20 days/360 days per year = $20. This amount agrees with the early-payment discount expressed as 2% of the $1,000 invoice amount.
To learn more, see the Related Topics listed below:
After working as an accountant, consultant, and university accounting instructor for more
than 25 years, Harold Averkamp formed AccountingCoach in 2003. His goal was to
share his knowledge and passion for teaching accounting with people throughout the
world at a very low cost. Read More...