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What is an early payment discount?

Author:
Harold Averkamp, CPA, MBA

Definition of Early Payment Discount

An early payment discount is a reduction in the amount on a supplier’s invoice if the customer pays the supplier promptly. The early payment discount is also known as a cash discount. (The seller may refer to the early payment discount as a sales discount. The buyer may refer to the early payment discount as a purchases discount.)

Not all companies offer early payment discounts. If the discount is allowed it will appear on the sales invoice.

Examples of Early Payment Discounts

Let’s assume that a company sells goods on credit and offers an early payment discount expressed as 1/10, net 30. This means that a customer is allowed to deduct 1% of the invoice amount, if payment is made within 10 days (instead of paying the full amount in 30 days). In other words, the customer saves 1% for paying 20 days early. Therefore, an invoice of $1,000 with terms of 1/10, net 30 means that the $1,000 obligation will be settled in full for $990 if it is paid within 10 days.

If the customer has adequate cash or a readily available line of credit, the 1% early payment discount for paying 20 days early equates to a very attractive annualized rate of approximately 18%. If the customer does not have cash or a credit line available, the early payment discount may not be worth the risk of a potential bank overdraft fee.

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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.

Learn More About Harold

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