Payment terms and early-payment discounts
Net 30, EOM and 2/10 net 30 on Northwind's bill, and why skipping a 2% discount costs about 37.2% a year.
Payment terms set the due date, and the due date is what everything else in AP runs from: the payment run, the aging, the cash forecast. Northwind's drill bill is dated September 3, 2026 on Net 30, so it is due October 3, 2026. Northwind paid $12,000 of it on September 20, 2026, well before that date. With no discount on offer, paying early gave up cash for nothing.
What 2/10 net 30 is really offering
Suppose the vendor had offered 2/10 net 30: 2% off if paid within 10 days, otherwise the full amount in 30. On $18,000 that is $360, for paying $17,640 by September 13, 2026 instead of $18,000 by October 3, 2026. Skipping the early-payment discount is borrowing $17,640 from the vendor for 20 days at a price of $360. Annualized, that is 37.2%.
The bill is recorded at the full amount when it arrives, because Northwind does not yet know whether it will pay early. If it does, the discount reduces the cost of what it bought. Northwind keeps perpetual inventory, so the discount is credited to inventory.
Drill bill paid inside the 2/10 net 30 window
| Account | Debit | Credit |
|---|---|---|
| 2000Accounts payable | 18,000.00 | |
| 1000Cash | 17,640.00 | |
| 1300Inventory | 360.00 | |
| Balanced | 18,000.00 | 18,000.00 |
Taking the discount. The bill closes at its full amount; the discount comes off the drills' cost.
Take the discount
- Good at
- $360 off the cost of the drills
- The same as earning 37.2% a year on that cash
- Watch for
$17,640 leaves 20 days sooner
- Best for
- A startup holding cash from a round, earning far less than the discount rate
Pay on the due date
- Good at
Keeps the cash for the full net period
- Watch for
Costs 37.2% a year, more than almost any other source of money
- Best for
- A company short of cash whose only alternative is borrowing above the discount rate
Pay early with no discount
- Good at
The vendor is pleased
- Watch for
Gives up the cash early and gets nothing for it
- Best for
- No one
Pay on the due date unless the vendor pays you to pay early, and when it does, run the number: 2/10 net 30 is worth 37.2% a year.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 330 (opens in a new tab)InventoryFree after registration
- Background reading — not an authority
- Wikipedia, “Net D” (opens in a new tab)Net D — payment termsFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Payment 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 fromConvention
- Early-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%Convention
- Perpetual inventoryUpdating the inventory account with every purchase and every sale, so cost of revenue is recorded sale by sale; the periodic alternative works it out at period end from a countConvention
- AgingGrouping open receivables or payables into buckets by days past due date — current, 1–30, 31–60, 61–90, 90+
See also
- Procure to pay (AP)The payables stack from requisition to reconciliation: requisition → PO → receipt → bill → approval → payment → reconciliation.
- Payment terms & due datesDue dates from payment terms, and whether an early-payment discount is worth taking.
- Journal entry for an inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- Vendor payment terms and early-pay discounts, explainedWhat Net 30 and 2/10 net 30 really mean, the annualized cost of skipping an early-pay discount, and how to schedule payment runs around your cash.
- Payment terms explained: Net 30, discounts and late feesHow to choose payment terms, count a due date, price an early-payment discount, set lawful late fees and work with enterprise procurement.
- BillFormPer-line coding, required evidence, discount ROI surfaced.
- PaymentRunBuilderShows the cash balance remaining after the run.