Sales and purchase discounts: 2/10, n/30 explained with journal entries

Invoices between businesses often carry a short code at the bottom: 2/10, n/30. It is an offer. The seller is saying, "pay the full amount within 30 days, but if you pay within 10, you can take 2% off." Sellers offer it to get cash sooner; buyers take it because 2% for paying 20 days early is a very good return on their money. Bookkeepers have to read the terms, check the dates, and record the payment correctly on whichever side of the deal they sit.

This page explains how to read credit terms, how to decide whether a payment earns the discount, and the journal entries for both the seller (a sales discount) and the buyer (a purchase discount). It uses the gross method, where the sale or purchase is first recorded at the full invoice price, and a perpetual inventory system, which is what our exercises use.

Reading credit terms

Credit terms have three parts:

• The discount percentage: the number before the slash. In 2/10, n/30 it is 2%.
• The discount period: the number after the slash. In 2/10 it is 10 days from the invoice date.
• The credit period: "n/30" means the net (full) amount is due within 30 days.

Other common forms work the same way. 1/10, n/30 is 1% off within 10 days. 3/15, n/45 is 3% off within 15 days, with the full amount due in 45. A plain "n/30" means no discount is offered at all.

Counting the days

Count from the invoice date. An invoice dated December 5 with terms 2/10 can be paid at the discount up to and including December 15. A payment on December 13 earns the discount; a payment on December 16 does not. The quickest test: subtract the invoice day from the payment day (when both are in the same month) and compare the result with the discount days. If the difference is equal to or less than the discount period, the discount applies.

Paying on the last day of the period still counts. That edge case is one of the most common slips, and our exercises include it.

Why buyers almost always take it

Under 2/10, n/30, paying on day 10 instead of day 30 saves 2% for giving up 20 days of credit. Expressed as a yearly rate, that is about 2 ÷ 98 × 365 ÷ 20 ≈ 37% [My calculation], far more than most businesses earn by keeping cash in the bank. That is why a bookkeeper who pays bills is often asked to schedule payments around discount deadlines, and why missing one is treated as a cost worth tracking.

The seller's side: sales discounts

When the customer pays within the discount period, three things happen at once. The full receivable is cleared, because the customer's debt is settled. Less cash comes in than the invoice amount. And the difference is recorded in Sales Discounts, a contra-revenue account with a normal debit balance. Like Sales Returns and Allowances, it is subtracted from gross sales on the income statement:

Net sales = Sales Revenue − Sales Returns and Allowances − Sales Discounts

Worked example: the customer pays early

Here is a problem from the practice set:

On December 5, Brightway Home Goods sold merchandise to Riverbend School on account for $3,680.00, terms 2/10, n/30. The sale and its cost were recorded that day. Riverbend School paid in full on December 13.

Step 1, the dates. December 13 − December 5 = 8 days. That is within the 10-day discount period, so the discount applies.

Step 2, the discount. 2% × $3,680.00 = $73.60. The cash received is $3,680.00 − $73.60 = $3,606.40.

Step 3, the entry.

Accounts Receivable is credited for the whole $3,680.00, even though only $3,606.40 arrived. If you credited only the cash received, the customer's account would show $73.60 still owing, and someone would eventually send a reminder for money that is not owed.

Worked example: the customer pays late

Change one fact: Riverbend School pays on December 21 instead. That is 16 days after the invoice, past the 10-day window. There is no discount, and the entry is a plain collection:

In practice customers sometimes take a discount they are no longer entitled to. That is a collections question for the seller; in the books, the amount short stays in Accounts Receivable until it is paid or written off.

The buyer's side: purchase discounts

Now sit on the other side. Brightway Home Goods bought $3,680.00 of merchandise from Sunvale Supply Co., terms 2/10, n/30, recorded it in Inventory on December 5, and paid on December 13. The payment is within the discount period, so Brightway pays $3,606.40 and saves $73.60.

Under a perpetual system the purchase discount reduces the cost of the inventory, because the goods really did cost less than the invoice said. So the discount is credited to Inventory:

The full payable is cleared, less cash leaves, and Inventory comes down to the true cost. Under a periodic system you would credit a contra account, Purchase Discounts, instead of Inventory; that account is reduced from purchases when cost of goods sold is worked out at period end. Our exercises use perpetual records, so a credit to Purchase Discounts is marked as a mistake with feedback explaining why.

Returns before payment: discount on what is still owed

The hardest exercises combine a return with an early payment. The rule is simple once you see it: the discount applies only to the balance still owed. Goods that were sent back were never paid for, so they cannot earn a discount.

On August 6, Brightway Home Goods sold merchandise to Riverbend School on account for $3,680.00, terms 2/10, n/30. On August 7, Riverbend School returned $920.00 of the goods. Riverbend School paid the balance it owed on August 14.

1. Balance owed after the return: $3,680.00 − $920.00 = $2,760.00.
2. Days: August 14 − August 6 = 8, inside the 10-day window.
3. Discount: 2% × $2,760.00 = $55.20. Cash received: $2,760.00 − $55.20 = $2,704.80.

Figuring the discount on the original $3,680.00 would give $73.60, which is $18.40 too much. Our checker recognises that answer and tells you why it is wrong.

Gross method vs net method

Everything above is the gross method: record the sale or purchase at the full invoice price and record the discount only if it is taken. Some businesses use the net method instead, recording purchases at the discounted price from the start because they expect always to pay early. If they then miss the window, the extra amount paid is recorded as a cost of missing the discount. The net method highlights lost discounts; the gross method is simpler and more common in introductory bookkeeping, and it is the one practised here.

Common mistakes

1. Ignoring an available discount. If the payment is inside the window, the cash amount is less than the invoice. Recording the full invoice in Cash overstates cash.
2. Taking a discount after the window closes. Count the days. One day late means full price.
3. Crediting the receivable for the cash received only. The whole invoice is settled, so the whole receivable comes off. The difference is the discount.
4. Using Purchase Discounts under a perpetual system. With perpetual records the discount reduces Inventory.
5. Discounting the original invoice after a return. Take the percentage of what is still owed.
6. Treating a sales discount as an expense. It is a contra-revenue account. It reduces net sales rather than appearing among operating expenses.

How the practice works

Each exercise generates fresh terms, dates and amounts, so you cannot memorise the answers; you have to read the terms and count the days. You record the entry by choosing accounts and typing amounts, then press Check. Your answer is compared line by line with an entry computed from the same facts. The set starts with a customer paying early, moves to paying a supplier early, then mixes early and late payments on both sides so you must decide each time, and finishes with returns followed by early payment.