A sales invoice will specify when the purchaser, customer, or client must pay for the goods or services that were (or will be) provided by the seller. Some of the more common payment terms include:
- Due upon receipt
- Net 30 days
- 2/10, net 30 days
- 1/10, net 30 days
In regards to the payment terms, the word net means the invoice amount minus any sales returns and/or sales allowances approved by the seller. For instance, if some of the goods received by the purchaser were damaged, the seller is likely to grant a sales allowance. Therefore, if the sales invoice is $2,100 and the seller granted the purchaser a $100 sales allowance, the net amount owed to the seller is $2,000.
The first two terms listed above do not permit the purchaser to take a discount for paying quickly. The remaining two terms communicate that a discount is offered if the purchaser pays within 10 days instead of paying in 30 days. (This discount is known as an early payment discount, a sales discount, or a cash discount.) For example, if an invoice states that the payment terms are 2/10, net 30 days it means that the purchaser may deduct 2% from the net amount owed, but only if the payment is made within 10 days of the invoice date (or perhaps within 10 days after the purchaser receives the invoice). Hence, if the sales invoice is $2,100 and the seller grants a $100 sales allowance, the net amount or $2,000 is due within 30 days. However, the 2/10, net 30 days allows the purchaser to deduct $40 (2% times the net amount of $2,000) if the purchaser remits $1,960 within 10 days. [When the terms are 1/10, net 30 days the purchaser can deduct 1% of the net amount if the amount is remitted within the discount period of 10 days.]
Not all sellers offer discounts for early payments. When sellers do offer the early payment discounts, generally they record the invoice amount as a credit to the Sales account and a debit to Accounts Receivable. If the purchaser remits the amount due within the discount period, the seller will 1) debit Cash for the amount received, 2) debit Sales Discounts for the allowed amount of the early payment discount, and 3) will credit Accounts Receivable for the total of the two debits (which should be the amount of the invoice).