Course Outline
Join PRO

What are invoice payment terms?

Author:
Harold Averkamp, CPA, MBA

Definition of Invoice Payment Terms

Invoice payment terms appear as part of the information shown on the invoice (or bill) prepared by a seller of goods or a provider of services. Generally, the invoice is prenumbered and the seller adds the purchaser’s name, address, when the invoice is to be paid, a detailed listing of the goods and/or services, the amount owed for each item, and the total amount of the invoice.

Some common invoice payment terms are:

  • Due upon receipt
  • Net 30 days
  • 2/10, net 30 days
  • 1/10, net 30 days

The word net in the terms means the invoice amount minus the amount allowed for having returned goods and/or allowances that were approved by the seller.

When the payment term is “2/10, net 30 days”, it means that the net amount is due in 30 days from the date of the invoice (or date goods were received). However, if the customer remits the net amount owed within 10 days (20 days sooner than the 30 days), the customer may subtract 2% from the net amount owed. This discount of 2% is known as an early payment discount or as a sales discount.

Example of Invoice Payment Terms

Assume that SalesMax shipped 100 units of Product Z to GoodCorp with a selling price of $12 a unit. SalesMax sends GoodCorp an invoice listing the items, the date shipped of June 15, and payment terms of 2/10, net 30.

When GoodCorp receives the 100 units of product, it discovers that 5 of the units were defective. After informing SalesMax, SalesMax issued a credit memo for $60 (5 units X $12) and asks GoodCorp to destroy or donate the 5 units. SalesMax will record the $60 credit memo by debiting Sales Returns and Allowances for $60 and crediting Accounts Receivable by $60. GoodCorp will record the credit memo by debiting Accounts Payable for $60 and crediting Purchase Returns and Allowances (or Inventory) for $60.

If GoodCorp pays SalesMax by June 25, GoodCorp will record the payment as follows:

  • Debit Accounts Payable for $1,140 ($1,200 – $60)
  • Credit Sales Discounts for $22.80
  • Credit Cash for $1,117.20

If GoodCorp pays SalesMax in 30 days (or if SalesMax did not offer an early payment discount), GoodCorp will debit Accounts Payable for $1,140 and will credit Cash for $1,140.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus