# Payment terms, discounts and late fees

> How Net 30 sets a due date, what a 2/10 net 30 discount really costs, how to book it, and when a late fee is collectible.

Source: https://lopifi.com/learn/net-30-payment-terms-and-discounts
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What do Net 30 and 2/10 net 30 mean, and should I offer an early-payment discount?** How Net 30 sets a due date, what a 2/10 net 30 discount really costs, how to book it, and when a late fee is collectible.

[Payment terms](https://lopifi.com/md/glossary/payment-terms) 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.

| Invoice | Issued | Terms | Due |
| --- | --- | --- | --- |
| INV-1001 | September 15 | Net 30 | October 15 |
| INV-1004 | October 9 | 2/10 net 30 | November 8 (discount until October 19) |
| INV-1005 | October 12 | Net 30 | November 11 |

The terms Northwind's invoices use, with the due dates the calculator gives.

## An early-payment discount, worked

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 [discount](https://lopifi.com/md/glossary/early-payment-discount). The invoice is settled in full: part by cash, part by the discount, which goes to a [contra-revenue account](https://lopifi.com/md/glossary/contra-revenue-account) 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 consideration](https://lopifi.com/md/glossary/variable-consideration): if Northwind expects Marlow to take it, the [transaction price](https://lopifi.com/md/glossary/transaction-price) 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.

> “An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items.”

© Financial Accounting Foundation. All rights reserved.

— [ASC 606-10-32-6](https://asc.fasb.org/606/tableOfContent), Discounts, credits and price concessions are variable consideration

> **What the discount costs.** Giving up 2% to be paid 20 days sooner is borrowing from the customer at about 37.2% a year. That's expensive money. Offer it only when cash today is worth that much, or when it buys a customer who otherwise pays on day 60.

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.

**Due on receipt**
- Pro: Fastest cash
- Pro: Nothing to chase if paid by card on file
- Con: Larger buyers' AP teams may refuse it
- Con: Pushes the cost of collecting onto the customer
- Best for: Small orders, new customers, anything paid by card

**Net 30**
- Pro: What most businesses expect
- Pro: Easy to count and to age
- Con: A month of revenue sits with customers
- Con: Slips to 45 or 60 in practice
- Best for: B2B customers with an AP department

**2/10 net 30**
- Pro: Pulls cash in 20 days earlier
- Pro: Rewards the customers who pay on time
- Con: Costs about 37.2% a year when taken
- Con: Customers take it late and short-pay
- Best for: Cash-tight months, large invoices to reliable payers

Choosing terms.

**Use case — The discount taken after the window.** A customer pays on day 18 and still deducts the 2%. The discount window closed on day 10. Either bill the difference or accept it as a concession, but decide on purpose and record which: it's a short pay with a reason, not a rounding difference.

## Where this lesson's rules come from

- [ASC 606-10-32-6](https://asc.fasb.org/606/tableOfContent) — Discounts, credits and price concessions are variable consideration (codification)
- [ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30](https://asc.fasb.org/606/tableOfContent) — Revenue from Contracts with Customers — the core principle, and recognition when control transfers (codification)

## Read further

- https://lopifi.com/md/startups/payment-terms-net-30-explained
- https://lopifi.com/md/startups/vendor-payment-terms-and-early-pay-discounts
- https://lopifi.com/md/tools/terms
- https://lopifi.com/md/docs/domain/05-order-to-cash

- **Track:** [Accounts receivable](https://lopifi.com/md/learn/ar)
- **Lesson:** Lesson 3 of 9 — 8 min
- **Terms taught:** [Payment terms](https://lopifi.com/md/glossary/payment-terms), [Early-payment discount](https://lopifi.com/md/glossary/early-payment-discount), [Contra-revenue account](https://lopifi.com/md/glossary/contra-revenue-account), [Variable consideration](https://lopifi.com/md/glossary/variable-consideration), [Transaction price](https://lopifi.com/md/glossary/transaction-price)
- **Previous:** [A correct invoice, and the tax on it, AR · Lesson 2](https://lopifi.com/md/learn/how-to-write-an-invoice)
- **Next:** [Invoice, revenue and cash: deposits and ASC 606, AR · Lesson 4](https://lopifi.com/md/learn/customer-deposits-and-revenue-recognition)
- **The course:** https://lopifi.com/md/learn