# 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.

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

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**What does 2/10 net 30 mean, and should we take 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](https://lopifi.com/md/glossary/payment-terms) set the due date, and the due date is what everything else in AP runs from: the payment run, the [Aging](https://lopifi.com/md/glossary/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.

| Terms | Due | Discount if paid by | Discount | Cost of skipping it, a year |
| --- | --- | --- | --- | --- |
| Net 30 | October 3, 2026 | — | — | — |
| EOM + 30 | October 30, 2026 | — | — | — |
| 15 MFI | October 15, 2026 | — | — | — |
| 1/10 net 30 | October 3, 2026 | September 13, 2026 | 180 | 18.4% |
| 2/10 net 30 | October 3, 2026 | September 13, 2026 | 360 | 37.2% |

One bill date, September 3, 2026, under the terms a founder meets most.

## 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](https://lopifi.com/md/glossary/early-payment-discount) is borrowing $17,640 from the vendor for 20 days at a price of $360. Annualized, that is 37.2%.

> **The formula.** Discount ÷ (1 − discount) × 365 ÷ (net days − discount days). For 2/10 net 30: 2 ÷ 98 × 365 ÷ 20 = 37.2% a year, simple. Compare it with what Northwind's cash earns, or what borrowing would cost it. If the discount rate is higher, take the discount.

*[Figure: ap payment run]*

2/10 net 30 on Northwind's bill: approved on the day it arrives, paid inside the discount window.

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](https://lopifi.com/md/glossary/perpetual-inventory), so the discount is credited to inventory.

**Take the discount**
- Pro: $360 off the cost of the drills
- Pro: The same as earning 37.2% a year on that cash
- Con: $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**
- Pro: Keeps the cash for the full net period
- Con: 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**
- Pro: The vendor is pleased
- Con: Gives up the cash early and gets nothing for it
- Best for: No one

2/10 net 30: take it or keep the cash.

> **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

- [Wikipedia, “Net D”](https://en.wikipedia.org/wiki/Net_D) — Net D — payment terms (reference)
- [ASC 330](https://asc.fasb.org/330/tableOfContent) — Inventory (codification)

## Read further

- https://lopifi.com/md/journal-entries/inventory-purchase
- https://lopifi.com/md/startups/vendor-payment-terms-and-early-pay-discounts
- https://lopifi.com/md/startups/payment-terms-net-30-explained
- https://lopifi.com/md/tools/terms
- https://lopifi.com/md/docs/domain/06-procure-to-pay

- **Track:** [Accounts payable](https://lopifi.com/md/learn/ap)
- **Lesson:** Lesson 4 of 8 — 9 min
- **Terms taught:** [Payment terms](https://lopifi.com/md/glossary/payment-terms), [Early-payment discount](https://lopifi.com/md/glossary/early-payment-discount), [Perpetual inventory](https://lopifi.com/md/glossary/perpetual-inventory), [Aging](https://lopifi.com/md/glossary/aging)
- **Previous:** [Purchase orders, approvals and three-way match, AP · Lesson 3](https://lopifi.com/md/learn/purchase-orders-and-three-way-match)
- **Next:** [Bills on the books: posting, paying and accruing, AP · Lesson 5](https://lopifi.com/md/learn/recording-bills-and-accrued-expenses)
- **The course:** https://lopifi.com/md/learn