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What does 2/10 mean in accounting?

Author:
Harold Averkamp, CPA, MBA

Definition of 2/10

2/10 is part of an early payment discount that allows a customer or client to pay after the sale or service has been provided. This sales discount allows the customer/client to deduct 2% of the amount owed if the amount is paid within 10 days of the sale, service, or date of the sales invoice.

Example of 2/10

Assume that a company is in an industry with credit terms of net 30 days. This means the amount owed by the customer is due within 30 days of the sale or service. Often the customers do not remit until after 30 days. To improve the collection of the money owed to the company (part of the company’s accounts receivable and the customer’s accounts payable), the company’s invoice may state credit terms such as 2/10, net 30.

For example, assume a company sells $3,000 of merchandise to a customer on December 3. The company’s sales invoice indicates credit terms of 2/10, net 30. This means that the customer’s $3,000 obligation will be eliminated if the customer remits $2,940 by December 13. If the customer pays on January 13, the full amount of $3,000 must be paid.

If the company’s terms were 1/10, net 30 the early payment discount will be 1% of the amount owed if paid within 10 days of the sale, service, or date of the sales invoice.

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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.

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