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.