Payment terms, discounts and late fees

Payment termsReceivablesPayment termsThe agreed timing of payment and any early-payment discount — Net 30, Net 30 EOM, 2/10 net 30, due on receipt; the due date that aging is measured from set the due date, and the due date sets everything after it: when the reminder goes out, which aging bucket the invoice sits in, and when the cash forecast expects the money. Net 30 means due 30 calendar days after the invoice date. Alder's September 15 invoice was due October 15. The payment-terms calculator counts it for you.

Marlow Workshop's $12,000 invoice is on 2/10 net 30: 2% off if paid within 10 days, otherwise the full amount in 30. Marlow paid $11,760 on October 16, inside the window, and took the $240 discountPayablesEarly-payment discountA reduction offered for paying before the net due date — 2/10 net 30 is 2% off if paid in 10 days, an annualized return of about 37%. The invoice is settled in full: part by cash, part by the discount, which goes to a contra-revenue accountRevenue recognitionContra-revenue accountAn account with a debit balance netted against gross revenue — returns, allowances, sales discounts, rebates — so net revenue is presented after them rather than to expense. Northwind adds 4010 Sales discounts to its chart for it.

Strictly, ASC 606 treats a discount the customer may take as variable considerationRevenue recognitionVariable considerationAny part of the price that can change — discounts, rebates, refunds, credits, usage, bonuses, penalties — estimated and included only to the extent a significant reversal is not probable: if Northwind expects Marlow to take it, the transaction priceRevenue recognitionTransaction priceThe consideration an entity expects to be entitled to for the contract, including estimated variable consideration and excluding amounts collected for third parties such as sales tax is the discounted amount from the start. A company that offers it rarely, at small amounts, often books it when taken, as above. That's a materiality call to make once and write down.

Late fees are the stick to the discount's carrot. A late fee is collectible only if the customer agreed to it, in the contract or in terms they accepted before buying, and state law, which varies, may limit how much can be charged. Many startups state one and waive it on the first late payment, which keeps it useful as leverage.