7.4: Invoicing - Terms of Payment and Cash Discounts - Mathematics

What a way to start your Monday morning! With dread you face a great stack of envelopes in your in-basket. Before opening any more envelopes that probably contain still more bills, you pour yourself another cup of coffee and settle down to figuring out how much you need to pay and when.

In the world of business, most purchases are not paid for in cash. Instead, businesses tend to work through an invoicing system in which they send out bills to their clients on a regular basis. In accounting, this means that the purchase is placed into accounts receivables until such time as a cheque arrives and the purchase is converted to cash. Invoices provide detailed transaction information, listing the amount owed and also indicating the terms on which payment is expected. Companies may offer what are known as cash discounts as incentives for early invoice payment. The rationale for these discounts is simple—a sale is not a sale until you have the cash in hand. The longer an invoice remains in accounts receivable, the less likely that it will be paid. Thus, it might turn into bad debt, which the creditor cannot collect at all.

Invoicing is less common in consumer purchases because of the sheer volume of transactions involved and the higher risk of nonpayment. Imagine purchasing items at Walmart and receiving an invoice to pay your bill next month instead of paying cash. It is hard to fathom the number of invoices Walmart would have to distribute monthly. How much would it cost to collect those debts? How many of those invoices would go unpaid? That is why consumer purchases typically do not involve invoicing.

Invoicing does commonly occur at a consumer level on credit card transactions along with many services where the business may not be able to assess the exact amount of the bill at the time of the transaction or until the service is delivered. Two examples illustrate this point:

  1. Think of your MasterCard bill. You are able to make purchases, say, from March 9 to April 8. Then on April 9 the company sends out a statement saying you have until April 29 to pay your bill. If you do not, interest and late payment penalties are involved.
  2. You have a dental visit for a regular cleaning. Before charging you, the dentist’s office needs to determine how much your insurance will cover. It may not find out the answer for a day or two, so it sends you an invoice at a later date once it hears from the insurance company. The invoice terms indicate that payment is due upon receipt and you will incur late penalties if payment is not forthcoming.

This section explores the most common aspects of invoicing, including terms of payments and cash discounts. You will learn to calculate the amount required to pay invoices and how to reduce the outstanding balance of an invoice if a partial payment is received. Additionally, the calculation of late payments and penalties is introduced.

Invoice Terms and Invoice Dating

You must know how to read a business invoice. The figure below[1] provides a sample invoice and highlights the following areas:

  1. Invoicing Company. The invoice must identify who is sending and issuing the invoice.
  2. Invoice Date. The date on which the invoice was printed, along with the invoice tracking number (in this case, the order date and shipping date are equivalent to the invoice date). When an invoice is paid, the cheque must reference the invoice number so that the invoicing company can identify which invoice to credit the payment to.
  3. Transaction Details. The details of the transaction might include number of units, unit prices, and any discounts for which the item is eligible.
  4. Invoice Total. The total amount owing is indicated, including any taxes or additional charges.
  5. Terms of Payment. The terms of payment include any cash discounts and due dates. The date of commencement (as discussed below) is determined from this part of the invoice.
  6. Late Penalty. A penalty, if any, for late payments is indicated on the invoice. Whether or not a company enforces these late penalties is up to the invoice-issuing organization.

Three Dates of Commencement

All invoice terms are affected by what is known as the date of commencement, which is the first day from which all due dates stated on the invoice will stem. The date of commencement is determined in one of three ways as illustrated below.

  1. Ordinary Invoice Dating. In ordinary invoice dating, or just invoice dating for short, the date of commencement is the same date as the invoice date. Therefore, if the invoice is printed on March 19, then all terms of payment commence on March 19. This is the default manner in which most companies issue their invoices, so if an invoice does not specify any other date of commencement you can safely assume it is using ordinary dating.
  2. End-of-Month Invoice Dating. End-of-month invoice dating applies when the terms of payment include the wording "end-of-month" or the abbreviation "EOM" appears after the terms of payment. In end-of-month dating, the date of commencement is the last day of the same month as indicated by the invoice date. Therefore, if the invoice is printed on March 19, then all terms of payment commence on the last day of March, or March 31. Many companies use this method of dating to simplify and standardize all of their due dates, in that if the date of commencement is the same for all invoices, then any terms of payment will also share the same dates.
  3. Receipt-Of-Goods Invoice Dating. Receipt-of-goods invoice dating applies when the terms of payment include the wording "receipt-of-goods" or the abbreviation "ROG" appears after the terms of payment. In receipt-of-goods dating, the date of commencement is the day on which the customer physically receives the goods. Therefore, if the invoice is printed on March 19 but the goods are not physically received until April 6, then all terms of payment commence on April 6. Companies with long shipping times involved in product distribution or long lead times in production commonly use this method of dating.

Terms of Payment

The most common format for the terms of paying an invoice is shown on the next page and illustrated by an example.

The figure below plots the invoice term of "3/10, net 30" along a time diagram to illustrate the terms of payment. This term is combined with various dates of commencement using the examples from the "Date of Commencement" section.

Note the following observations:

  • In all four scenarios, the total length of all bars is the same, since the credit period is 30 days.
  • Although all four invoices have the same invoice date of March 19, the date of commencement is modified in the ROG and EOM scenarios, which shift the discount and credit periods into the future. In these cases, any payment before the end of the discount period qualifies for the discount. For example, in the EOM scenario a company could pay its bill early on March 27 and qualify for the 3% cash discount.

You may see invoice terms displayed in several other common formats:

  1. 3/10, (n)/30: In this case, the word "net" has been abbreviated to "(n)/". This is illustrated in the fourth scenario in the figure.
  2. 3/10, 2/20, (n)/30. In this case, multiple cash discounts are being offered, meaning 3% within 10 days from the date of commencement and 2% from the 11th to the 20th day from the date of commencement. This is also illustrated in the fourth scenario of the figure.
  3. (n)/30. In this case, no cash discount is offered and only the credit period is identified.

Rules for Invoice Terms

Some common business practices are implemented across most industries. Note that you must always check with the invoicing organization to ensure it is applying these practices.

  1. No Net Figure. If no net figure is stated in the terms of payment, you should assume that the credit period is 20 days after the last discount period. If there are no discount periods, then the credit period is 20 days from the date of commencement. For example, "3/10, 2/15" means that the credit period ends 20 days after the second discount period of 15 days. Hence, the credit period is 35 days after the date of commencement.
  2. No Cash Discount. Not every invoice receives a cash discount. If no terms indicate a cash discount, then the invoicing company seeks full payment only. For example, "(n)/30" means that no cash discount applies and the credit period ends 30 days from the date of commencement.
  3. Nonbusiness Days. Most businesses operate Monday through Friday and are closed on weekends and holidays. As such, any date falling on a nonworking day is moved to the next business day. For example, if an invoice is ordinary dated December 21 and lists a cash discount of 2/10, the end of the discount period falls on January 1. Since this is New Year's Day, the discount period extends to January 2. In this textbook, you should apply this practice to any of the five known statutory holidays discussed in Chapter 4 (New Year's Day, Good Friday or Easter Monday in Quebec only, Canada Day, Labour Day, and Christmas Day).

Three Types of Payments

When businesses pay invoices, three situations can occur:

  1. Full Payment. A full payment means that the company wants to pay its invoice in full and reduce its balance owing to zero dollars. This is the most common practice.
  2. Partial Payment. A partial payment means that the company wants to lower its balance owing but will not reduce that balance to zero. A company will generally employ this method when it wants to either lower its accounts payable or demonstrate good faith in paying its invoices. Partial payment may also occur if the company wants to take advantage of a cash discount but lacks the funds to clear the invoice in its entirety.
  3. Late Payment. A late payment occurs when the company pays its invoice either in full or partially after the credit period has elapsed. Late payments occur for a variety of reasons, but the most common are either insufficient funds to pay the invoice or a simple administrative oversight.

The rest of this section shows you how to handle each of these types of payments mathematically, and it also explores the implications of cash discounts.

Exercise (PageIndex{1}): Give It Some Thought

In each of the following cases, determine which term of payment results in the longest credit period extending from the invoice date.

  1. 3/15, (n)/45 or 2/10, 1/20
  2. 3/15, (n)/45 or 2/10, (n)/35 ROG, or 2/20 EOM on an invoice dated September 22 and goods received on September 29
  1. 30 days or 35 days
  2. 45 days or 40 days
  3. 60 days or 54 days (24 days left in January plus 30 more)
  4. 45 days or 42 days (7 days until received plus 35) or 48 days (8 left in month plus 40 more)

Full Payments

In the opening scenario in this section, the first invoice on your desk was for $3,600 with terms of 2/10, 1/20, net 30. Suppose that invoice was dated March 19. If you wanted to take advantage of the 2% cash discount, when is the last day that payment could be received, and in what amount would you need to write the cheque? In this section, we will look at how to clear an invoice in its entirety.

The Formula

The good news is that a cash discount is just another type of discount similar to what you encountered in Section 6.1, and you do the calculations using the exact same formula. Apply Formula 6.1 on single discounts, which is reprinted below.

How It Works

Follow these steps when working with payments and invoices:

Step 1: Look for and identify key information such as the invoice date, date of commencement modifiers such as EOM or ROG, terms of payment, late penalty, and the invoice amount.

Step 2: Draw a timeline similar to the figure on the next page. On this timeline, chronologically arrange from left to right the invoice date and amount, the date of commencement, the end of any discount (if any) or credit periods, cash discounts (if any) that are being offered, and penalties (if any).

Step 3: Determine when payments are being made and in what amount. Locate them on the timeline.

Step 4: Apply the correct calculations for the payment, depending on whether the payment is a full payment, partial payment, or late payment.

Let’s continue with the example of the first invoice on your desk. You mail in a cheque to be received by March 29. What amount is the cheque?

Step 1: The invoice amount is (L) = $3,600, invoice date is March 19, and terms of payment are 2/10, 1/20, net 30.

Step 2: The figure on the next page displays the invoice timeline.

Step 3: Note on the timeline that a payment on March 29 is the last day of the 2% discount period.

Step 4: According to Formula 6.1, the amount to pay is (N=$ 3,600 imes(1-0.02)=$ 3,600 imes .098=$ 3,528). A cheque for $3,528 pays your invoice in full. By taking advantage of the cash discount, you reduce your payment by $72.

Things To Watch Out For

If there is one area of invoicing that causes the most confusion, it is assigning information to the net price and invoice amount variables. These are commonly assigned backwards. Remember these rules so that you always get the correct answer:

  1. The invoice amount or any reference to the balance owing on an invoice is always a list price.[ ext{List Price }= ext{ Invoice Amount} onumber]
  2. The payment of an invoice, whether in full, partial, or late, is always a net price.[ ext{Net Price }= ext{ Payment Amount} onumber]

Paths To Success

Who cares about 1% or 2% discounts when paying bills? While these percentages may not sound like a lot, remember that these discounts occur over a very short time frame. For example, assume you just received an invoice for $102.04 with terms of 2/10, (n)/30. When taking advantage of the 2% cash discount, you must pay the bill 20 days early, resulting in a $100 payment. That is a $2.04 savings over the course of 20 days. To understand the significance of that discount, imagine that you had $100 sitting in a savings account at your bank. Your savings account must have a balance of $102.04 twenty days later. This requires your savings account to earn an annual interest rate of 44.56%! Therefore, a 20-day 2% discount is the same thing as earning interest at 44.56%. Outrageously good!

Exercise (PageIndex{2}): Give It Some Thought

In each of the following cases, determine the cash discount or penalty for which the payment qualifies.

Invoice DateTerms of PaymentPayment Received on
1. April 142/10, (n)/30April 24
2. July 73/10, 2/20, (n)/30 EOM, 1% per month penaltyAugust 12
3. November 12 (goods received November 28)2/20 ROG, 2% per month penaltyDecember 29
4. February 27 (non–leap year)4/10, 2/15, 1/25 EOMMarch 25
  1. 2% discount
  2. 2% discount
  3. no discount (0%) or penalty
  4. 1% discount

Example (PageIndex{1}): Paying Your Bills in Full

You receive an invoice for $35,545.50 dated August 14. The terms of payment are listed as 3/10, 2/20, net 45 EOM. The accounting department is considering paying this debt on one of three days. Determine the full payment required if payment is received by the invoicing company on each of the following dates:

  1. September 3
  2. September 19
  3. September 30


In each case, calculate the full payment ((N)) after applying any cash discount.

What You Already Know

Step 1:

The invoice amount, terms of payment, and any payments are known:

(L) = $35,545.50

Invoice date = August 14

Terms of payment = 3/10, 2/20, net 45 EOM

Three payment date options are September 3, September 19, and September 30.

Steps 2 & 3:

The figure below illustrates the timeline for the invoice and identification of payments.

How You Will Get There

Step 4:

Calculate the payment required by applying Formula 6.1. As noted on the timeline:

  1. The first payment option qualifies for (d) = 3%.
  2. The second payment option qualifies for (d) = 2%.
  3. The third payment option qualifies for (d) = 0% (no cash discount).


Step 4:

  1. (N) = $35,545.50 × (1− 0.03) = $35,545.50 × 0.97 = $34,479.14
  2. (N) = $35,545.50 × (1 – 0.02) = $35,545.50 × 0.98 = $34,834.59
  3. (N) = $35,545.50 × (1 − 0) = $35,545.50 × 1 = $35,545.50

(Note that since there is no discount in part (c), you could have concluded that (N = L))

If the invoicing company receives payment on September 3, a 3% discount is allowed and $34,479.14 clears the invoice. If the payment is received on September 19, a 2% discount is allowed and $34,834.59 pays it off. Finally, if the payment arrives on September 30, there is no discount so the full invoice amount of $35,545.50 is due.

Partial Payments

In the section opener, your third invoice is for $21,000 with terms of 2/15, 1/25, net 60 ROG. After you paid the $3,528 to clear the first invoice, you realize that your company has insufficient funds to take full advantage of the 2% cash discount being offered by the transportation company. Not wanting to lose out entirely, you decide to submit a partial payment of $10,000 before the first discount period elapses. What is the balance remaining on the invoice?

Unless you pay attention to invoicing concepts, it is easy to get confused. Perhaps you think that $10,000 should be removed from the $21,000 invoice total, thereby leaving a balance owing of $11,000. Or maybe you think the payment should receive the discount of 2%, which would be $200. Are you credited with $9,800 off of your balance? Or maybe $10,200 off of your balance? In all of these scenarios, you would be committing a serious mistake and miscalculating your balance owing. Let’s look at the correct way of handling this payment.

The Formula

Recall that invoice amounts are gross amounts (amounts before discounts), or (G), and that payment amounts are net amounts (amounts after discounts), or (N). Also recall that an algebraic equation requires all terms to be expressed in the same unit.

In the case of invoice payments, you can think of the balance owing as being in the unit of "pre-discount” and any payment being in the unit of "post-discount." Therefore, a payment cannot be directly deducted from the invoice balance since it is in the wrong unit. You must convert the payment from a “post-discount" amount into a "pre-discount" amount using a rearranged version of Formula 6.1. You can then deduct it from the invoice total to calculate any balance remaining.

How It Works

Follow the same invoice payment steps even when working with partial payments. Commonly, once you calculate the gross amount of the payment in step 4 you will also have to calculate the new invoice balance by deducting the gross payment amount.

Let’s continue working with the $21,000 invoice with terms of 2/15, 1/25, net 60 ROG. Assume the invoice is dated March 19 and the goods are received on April 6. If a $10,000 payment is made on April 21, what balance remains on the invoice?

Step 1: The invoice amount is $21,000, the invoice date is March 19, goods are received on April 6, and the terms of payment are 2/15, 1/25, net 60. A payment of $10,000 is made on April 21.

Step 2: The figure below shows the invoice timeline.

Step 3: The payment of $10,000 on April 21 falls at the end of the first discount period and qualifies for a 2% discount.

Step 4: To credit the invoice, apply the rearranged Formula 6.1:

[L=dfrac{$ 10,000}{(100 \%-2 \%)}=dfrac{$ 10,000}{98 \%}=dfrac{$ 10,000}{0.98}=$ 10,204.08 onumber]

This means that before any cash discounts, the payment is worth $10,204.08 toward the invoice total. The balance remaining is ($ 21,000.00-$ 10,204.08=$ 10,795.92).

Important Notes

In the case where a payment falls within a cash discount period, the amount credited toward an invoice total is always larger than the actual payment amount. If the payment does not fall within any discount period, then the amount credited toward an invoice total is equal to the actual payment amount (since there is no cash discount).

To help you understand why a partial payment works in this manner, assume an invoice is received in the amount of $103.09 and the customer pays the invoice in full during a 3% cash discount period. What amount is paid? The answer is (N=$ 103.09(100 \%-3 \%)=$ 100). Therefore, any payment of $100 made during a 3% cash discount period is always equivalent to a pre-discount invoice credit of $103.09. If the balance owing is more than $103.09, that does not change the fact that the $100 payment during the discount period is worth $103.09 toward the invoice balance.

Exercise (PageIndex{3}): Give It Some Thought

In each of the following situations, determine for the partial payment whether you would credit the invoice for an amount that is larger than, equal to, or less than the partial payment amount.

  1. An invoice dated April 7 with terms 4/20, 2/20, (n)/60 EOM. The goods are received on April 9 and a partial payment is made on May 21.
  2. An invoice dated July 26 with terms 3/30, (n)/45 ROG. The goods are received on August 2 and a partial payment is made on September 3.
  3. An invoice dated January 3 with terms 2½/10, 1/20. The goods are received on January 10 and a partial payment is made on January 24.
  1. Since the payment falls within a discount period, the credited amount is larger than the payment.
  2. Since the payment does not fall within a discount period, the credited amount is equal to the payment.
  3. Since the payment falls within a discount period, the credited amount is larger than the payment.

Example (PageIndex{2}): Applying Your Partial Payments toward Your Balance Owing

Heri just received an invoice from his supplier, R&B Foods. The invoice totalling $68,435.27 is dated June 5 with terms of 2½/10, 1/25, (n)/45. Heri sent two partial payments in the amounts of $20,000 and $30,000 that R&B Foods received on June 15 and June 29, respectively. He wants to clear his invoice by making a final payment to be received by R&B Foods on July 18. What is the amount of the final payment?


Determine the amount of the final payment ((N)) after the first two partial payments are credited toward the invoice total. To credit the two partial payments you must find the list amount before any cash discounts (L) such that the payment can be deducted from the invoice total.

What You Already Know

Step 1:

The invoice amount, terms of payment, and payment amounts are known:

(L) = $68,435.27

Invoice date = June 5

Terms of payment = 2½/10, 1/25, (n)/45

(N_1) = $20,000 on June 15, (N_2) = $30,000 on June 29, (N_3) = ? on July 18

Steps 2 & 3:

The figure illustrates the timeline for the invoice and identifies the payments.

How You Will Get There

Step 4:

The first two payments are partial. Apply the rearranged Formula 6.1. As noted on the timeline:

  1. The first partial payment qualifies for (d) = 2½%.
  2. The second partial payment qualifies for (d) = 1%.
  3. The last payment is a full payment, where (d) = 0% (no cash discount).


Step 4:

  1. (L=dfrac{$ 20,000}{(1-0.025)}=dfrac{$ 20,000}{0.975}=$ 20,512.82), Balance Owing (= $68,435.27 − $20,512.82 = $47,922.45)
  2. (L=dfrac{$ 30,000}{(1-0.01)}=dfrac{$ 30,000}{0.99}=$ 30,303.03), Balance Owing (= $47,922.45 − $30,303.03 = $17,619.42)
  3. Since there is no cash discount, (N_3 = L). The balance owing is (L) = $17,619.42. Therefore, the payment is the same number and (N_3) = $17,619.42.

The first two payments receive a credit of $20,512.82 and $30,303.03 toward the invoice total, respectively. This leaves a balance on the invoice of $17,619.42. Since the final payment is made during the credit period, but not within any cash discount period, the final payment is the exact amount of the balance owing and equals $17,619.42.

Late Payment Penalties

Among all of the invoices that you were paying in the section opener, you realize upon opening that third envelope that you somehow missed an invoice last month and failed to pay the $4,000 owing, which is now overdue. In looking at the invoice, you notice that it states on the bottom that late payments are subject to a 3% per month penalty. You urgently want to pay this invoice to maintain good relations with your supplier but wonder in what amount you must issue the cheque?

Why Do Late Penalties Exist?

Suppliers are doing their business customers a favor when they use invoicing to seek payment. In essence, suppliers provide the products to the customer but are not paid for those products up front. This means customers are granted a period during which they "borrow" the products for free without any associated interest costs that are usually tied to borrowing. If the invoice is not paid in full by the time the credit period elapses, then the supplier starts treating any remaining balance like a loan and charges interest, which is called a late payment penalty.

The Formula

When a payment arrives after the credit period has expired, you need to adjust the balance of the invoice upward to account for the penalty. Continue to use Formula 6.1 on Single Discounts for this calculation. In this unique case, the discount rate represents a penalty. Instead of deducting money from the balance, you add a penalty to the balance. As a result, the late penalty is a negative discount. For example, if the penalty is 3% then (d) = −3%.

How It Works

Follow the same steps to solve the invoice payment once again when working with late payments. As an example, work with the $4,000 overdue invoice that is subject to a 3% per month late penalty. If the invoice is paid within the first month of being overdue, what payment is made?

Step 1: The invoice balance is (L) = $4,000, and the penalty percent is (d) = −0.03.

Steps 2 & 3: Since the focus is strictly on the late payment calculation, you do not need a timeline for the discount or credit periods. The late payment occurs within the first month past the expiry of the credit period.

Step 4: To determine the new invoice balance, apply Formula 6.1 to calculate (N=$ 4,000 imes(1-(-0.03))=$ 4,000 imes 1.03=$ 4,120). Therefore, to clear the invoice you must issue a cheque in the amount of $4,120. This covers the $4,000 owing along with a late penalty of $120.

Important Notes

Not all invoices have penalties, nor are they always enforced by the supplier. There are many reasons for this:

  1. Most businesses pay their invoices in a timely manner, which minimizes the need to institute penalties.
  2. Waiving a penalty maintains good customer relations and reinforces a positive, cooperative business partnership.
  3. Strict application of late penalties results in difficult situations. For example, if a payment was dropped in the mail on August 13 from your best customer and it arrives one day after the credit period expires on August 15, do you penalize that customer? Is it worth the hassle or the risk of upsetting the customer?
  4. The application of late penalties generally involves smaller sums of money that incur many administrative costs. The financial gains from applying penalties may be completely wiped out by the administrative expenses incurred.
  5. Businesses have other means at their disposal for dealing with delinquent accounts. For example, if a customer regularly pays its invoices in an untimely manner, the supplier may just to decide to withdraw the privilege of invoicing and have the customer always pay up front instead.

In this textbook, all penalties are strictly and rigidly applied. If a payment is late, the invoice balance has the appropriate late penalty applied.

Things To Watch Out For

When a late penalty is involved, you must resist the temptation to adjust the payment by the penalty percentage. The discussion and calculations in this section focus on adjusting the outstanding invoice balance to figure out the payment required. For example, assume there is a $500 outstanding balance subject to a 2% penalty.

  • This means that with the penalty, the invoice total is $510, which determines that a payment of $510 is required.
  • If the customer makes a $200 partial payment on this late debt, you cannot apply the partial payment procedure, which would give a credit of $204.08 for the payment, resulting in a balance owing of $295.92. If you make this mistake, you in fact reward the customer for being tardy!
  • Nor can you deduct the 2% penalty from the payment and give credit for $200(1 – 0.02) = $196 (resulting in a balance owing of $304) because the 2% penalty applies to the whole invoice amount and not just the partial payment.
  • Instead, the $200 payment must be deducted directly from the penalty-adjusted balance of $510. In this case, the customer still owes $310 to clear the invoice.

Paths To Success

An alternative method for applying a late penalty is to treat the penalty like a positive percent change (see Section 3.1). In this case, the penalty is how much you want to increase the balance owing. Thus, if an invoice for $500 is subject to a 2% penalty, the ∆% = 2% and Old = $500. The goal is to look for the New balance in Formula 3.1:

[Delta \%=dfrac{ ext {New -Old}}{ ext { old }} imes 100 quad 2 \%=dfrac{ ext { New }-$ 500}{$ 500} imes 100 quad ext{New }$=$10 onumber]

Example (PageIndex{3}): Whoops! I Missed the Due Date!

You received an invoice dated December 17 in the amount of $53,455.55 with terms of 4/15, 2/30, (n)/60 ROG, 2.75% penalty per month for late payments. The merchandise is received on January 24. You sent in a partial payment of $40,000 on January 31 with intention to pay the remaining balance before the credit period expired. However, you forgot about the invoice and realized your mistake on March 30, when you submit payment in full for the invoice. What amount is the final payment? (Note: Assume this is not a leap year).


The final payment must cover the invoice balance owing on any remaining balance after the partial payment is credited and the outstanding balance is penalized as per the late penalty.

What You Already Know

Step 1:

The invoice amount, terms of payment, and payment information are known:

(L) = $53,455.55, Invoice date = December 17

Goods received = January 24

Terms of payment = 4/15, 2/30, (n)/60 ROG

2.75% penalty per month for late payments

(N_1) = $40,000 on January 31

(N_2) = ? on March 30

Steps 2 & 3:

The figure on the next page illustrates the timeline for the invoice and identifies the payments.

How You Will Get There

Step 4 (Partial Payment):

Credit the partial payment during the discount period ((d) = 4%) by applying the rearranged Formula 6.1.

Step 4 (New Invoice Balance):

Deduct the partial payment from the invoice total.

Step 4 (Late Payment):

The second payment occurs after the credit period elapses. Therefore the outstanding invoice balance is penalized by (d) = −0.0275 as per the policy. Apply Formula 6.1. This calculates the outstanding balance including the penalty, which equals the final payment.


Step 4 (Partial Payment):

(L=dfrac{$ 40,000}{(1-0.04)}=dfrac{$ 40,000}{0.96}=$ 41,666.67)

Step 4 (New Invoice Balance):

Balance Owing (= $53,455.55 − $41,666.67 = $11,788.88)

Step 4 (Late Payment):

N&=$11,788.88 imes(1-(-0.0275))
N&=$11,788.88 imes 1.0275
&=$ 12,113.07

The first payment resulted in a $41,666.67 deduction from the invoice. The overdue remaining balance of $11,788.88 has a penalty of $324.19 added to it, resulting in a final clearing payment of $12,113.07.


  1. Invoice provided by and courtesy of Kerry Mitchell Pharmacy Ltd. And Shoppers Drug Mart

7.4: Invoicing - Terms of Payment and Cash Discounts - Mathematics

Indication "2/10, n/30" (or "2/10 net 30") on an invoice represents a cash (sales) discount provided by the seller to the buyer for prompt payment.

The term 2/10, n/30 is a typical credit term and means the following:

  • "2" shows the discount percentage offered by the seller.
  • "10" indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount.
  • "n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.

The terms offered by the seller usually depend on the trade custom. Some variations of the cash discount terms, among others, may be "2/15, n/30" (2% discount for the payment within 15 days and the full amount to be paid within 30 days) or "n/10 EOM" (the invoice is due and payable 10 days after the end of the month in which the sale occurred).

In accounting, a cash (sales) discount represents an expense to the seller. The account used to recognize the expense may be called "Sales Discount" or "Discount on Sales."

The buyer treats such a discount as a reduction of the cost and uses the account called "Purchases Discount" or "Discount on Purchases."

How to Implement a Legal and Compliant Cash Discount Program

By now, you’ve probably become aware of the rising popularity of Cash Discount programs as a way to offset your merchant service fees. A Cash Discount program is a method of implementing a service fee to all customers who pay with a card, while providing a discount to those who pay with cash. Cash Discount programs are legal in all 50 states per the Durbin Amendment (part of the 2010 Dodd-Frank Law), which states that businesses are permitted to offer a discount to customers as an incentive for paying with cash. While this type of program has been used by gas stations for years now (displaying cash prices), there is still confusion on how to implement a Cash Discount program the right way.

Guidelines and Requirements

The card associations have strict guidelines on how a Cash Discount program must be implemented. The essential steps being 1) Correct signage must be posted at the door and check out 2) The amount of the added service fee must be clearly displayed on the receipt and 3) Offering your customers a cash discount verbally. Even though gas stations post different prices, as a retailer it is not necessary to do so. The posted prices are considered cash prices and the signage allows for a fee if the payment is not made with cash. In order to be compliant, merchants with a Cash Discount Program need to display the Base Amount of the transaction, the Cash Discount, and the Total Cost of the transaction on the customers’ receipt (see below).

Applying the Service Fee

Without the proprietary technology programmed into your terminals, you would have to manually apply the service fee. But if a fee is incorrectly applied to a transaction, the additional fee charged to customers would be labeled as a Surcharge which is prohibited in 10 states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas). If the fee is not a Cash Discount and is deemed as a Surcharge, even if allowed in your state, has strict requirements on the amount of the Surcharge. As a merchant, you must register with Visa/MasterCard in order to legally apply the surcharge. A Cash Discount Program has no necessary registration.


It is also important to note that you are forbidden by Visa, Mastercard, and your processor’s rules to profit on a credit card transaction, which could happen if you accidentally charged more than you were charged by your processor. While many processors may offer a Cash Discount program, not all of them offer and utilize the compliant technology that is compatible with your terminals. A major difference we have seen while looking at the providers across the industry is the Cash Discount line item. Many providers offer a program without the Cash Discount line item showing on the receipt. It is important that when looking at processors, they are offering you a compliant program with capable technology to display the required line items on the receipt.

BUS Math: Ch7 - Trade Discounts -Single and Chain

Step2) Calculate end of credit period:
186 days + 30 = 216 days
*Use calendar table, find 216 and we see the date is August 4.

Step 2) Calculate end of 1% discount period:
May 18 end of 2% discount period + 5 days = May 23 end of 1% discount period.

Step 3) Calculate end of credit period:
May 8 in Calendar table is 128 days
128 days + 30 = 158 days
*Use calendar table, find 158 and we see the date is June 7.

Step2) Calculate the end of the credit period:
August 10 + 20days = Aug 30 (credit period is 20 days after discount period.

So the discount amount =
950 x 2% = 950 x 0.02 = $19

And the net payment =
950 - 19 = $931

The date of payment is 8/15 (i.e 15th of August) which is after 10 days and before 15 days from the date of invoice.
****So 2/15 condition applied. So 2% discount allowed.

So the discount amount =
650 x 2% = 650 x 0.02 = $13

And the net payment =
650 - 13 = $637

750 * 2% = 15 - Cash discount

Manufacturer B
100-26 = 74
0.74 X 0.90 = 0.666
1 - 0.6808 = 0.334 = 33.40%

Manufacturer B
100-26 = 74
0.74 X 0.92 = 0.6808
1 - 0.6808 = 0.3192 = 31.92%

Business math

Principal - 6000 Rate - 5% Effective Date - May 15 Maturity Date - November 1 Partial Payment Amount - $1500 Partial Payment Date -August 15 Also Answer the following questions: 1. NUMBER OF DAYS BETWEEN EFFECTIVE DATE AND PARTIAL

1. An invoice is dated August 29 with terms of 4/15 EOM. What is the discount date? 2. What is the net date for the scenario in the previous question?

Bus. Math 123

Problem: Invoice-Nov. 27. Date goods recvd. ? Terms- 2/10 EOM. Last day of discount- ? Final day bill is due ? Complete above.


An invoice is dated January 24 with terms 2/10 – 20x. Find the final discount date and the net payment date. The net payment date is 20 days after the final discount date. The final discount date is 2/23. The net payment date is

Business math

An invoice is dated January 25 with terms 2/10 -20x. Find the final discount date and the net payment date. The net payment date is 20 days after the final discount date.

Business math please help me

An invoice is dated August 29 with terms of 4/15 EOM. What is the discount date? (Points What is the net date for the scenario in the previous question? (Points : 2.5)

Business Math

Jones Manufacturing sent Blue Company an invoice for equipment with a list price of $10,000. The invoice is dated July 27 with terms of 2/10, EOM. Blue Company is entitled to a 40% trade discount. If the invoice is paid on

Business matematics

An invoice date 10april 2004 for Rm2,300 of 3/10,2/20 20 april 2004. Find the payment if the invoice was paid on 8 may 2004

Business Math - Please Help is Possible!

Import exclusives Ltd. received an invoice dated June 28 from Dansk Specialties of Copenhagen with terms 5/20, n/45: 100 teak trays at $34.30 each 25 teak ice buckets at $63.60 each 40 teak salad bowls at $54.50 each. All items

Business math

Tod's Furniture buys a living room set with a $4000 list price and a 55% trade discount. Freight (FOB shipping point) of $50 is not part of the list price. What is the delivered price(including freight) of the living room set ,

3. The new Ford car dealership in town is labeling the MSRP for all of their new vehicles 7% above their invoice price. If the invoice price of the new Ford Focus is $21,500, what is the MSRP? (Section 15.2) (1 point) 4. The Honda

a man gets an invoice for $460 with terms 2/10, 1/15, n28 ow much would he pay 25 after the invoice date? help a little confused?

7.4: Invoicing - Terms of Payment and Cash Discounts - Mathematics

of FORESTADENT Bernhard Foerster GmbH, Pforzheim (October 01, 2018)

1.) Scope of application, diverging terms and conditions, future transactions
1.1) These General Terms of Sale, Delivery and Payment (hereinafter “GTC”) shall apply to all our offers and declarations of acceptance, contracts as well as deliveries and services.
1.2) The GTC are valid only for transactions with businesses within the meaning of Sec. 14 BGB. They apply exclusively and exhaustively. Any business terms and conditions of Buyer conflicting with or diverging from these GTC will not be accepted unless expressly approved by us in writing in the particular case.
1.3) In the case of continuous business relations, these GTC shall also apply to all future transactions without any express reference to these GTC being required.

2.) Written/text form, offers, effective contract
2.1) All offers and declarations of acceptance, amendments and other subsidiary arrangements and agreements made prior to or at the time of conclusion of a contract will only be effective if laid down in written form or text form (both jointly “written form” or “in writing” hereinafter).
2.2) Unless expressly specified or agreed as binding, our offers remain subject to change, especially as regards prices, quantities, delivery periods and delivery capacities. Buyer remains bound by his offer for four weeks and for two weeks in the case of goods which are in stock. A contract becomes effective only upon written confirmation of an order received by us but at the latest – sec. 2.1 notwithstanding, upon Buyer’s acceptance of the delivery.

3.) Prices, ancillary costs, price adjustments, currency
3.1) Except where agreed otherwise in writing our prices will be ex works Pforzheim, plus packaging and plus statutory value-added tax.
3.2) If delivery is made more than four weeks after signing of the contract and no fixed price has been agreed, we may, in the event of changes in cost, appropriately adjust the prices in accordance with the change in wages, salaries, taxes, shipping, material and production costs that has occurred in the meantime. The prices may not be increased for purposes of additional profit. If prices are increased by more than 5 % Buyer may withdraw from the contract.
3.3) Prices will be set in Euro currency, unless agreed otherwise. Where payment in a different currency has been agreed and the exchange rate between such currency and the Euro changes subsequently, the payment shall be based on the Euro price calculated in accordance with the exchange rate applicable on the day the goods are dispatched ex works Pforzheim.

4.) Payment terms, payment, default, setoff/right of retention, deterioration of financial situation
4.1) Unless otherwise specified or agreed, payments are due net within 30 days after invoicing a 2 % cash discount may be applied to payments made within 14 days after invoicing. If payment is not made within 30 days Buyer will be in default.
4.2) In the event of default in payment we may charge interest at a rate of 9 % above the applicable base rate. We reserve the right to claim the statutory default lump-sum as well as to assert a higher damage caused by the default.
4.3) Bills of exchange will be accepted only upon separate agreement and only on account of payment. Credit notes for bills of exchange and cheques are subject to receipt and shall not affect any earlier maturity of the purchase price in the event of Buyer’s default. Their value date is the day on which the equivalent value is available to us. Discount and other charges will be borne by Buyer. In the event of self-discounting we may bill the customary bank discount charges.
4.4) Buyer may assert rights of setoff only on the basis of counterclaims that are established by final enforceable judgment, ready for decision or uncontested. Buyer may assert rights of retention only on the basis of counterclaims from the same contractual relationship that are established by final enforceable judgment, ready for decision or uncontested.
4.5) For international orders we may require payment against irrevocable letter of credit at our bank account or payment “cash against documents”.
4.6) If it becomes foreseeable after signing of a contract that our claim for counter-performance is at risk due to lack in performance capacity on Buyer’s part, we may refuse performance until Buyer has provided counter-performance or a security for it. We may set a reasonable respite within which Buyer, at Buyer’s option, has to counter-perform or provide security concurrently with the performance. Upon expiration of the respite we will have the right to withdraw from the contract and/or claim damages or reimbursement of expenses if the statutory requirements are fulfilled.

5.) Delivery, delivery deadlines/delivery periods, partial delivery, force majeure, delay in delivery, self-supplies
5.1) Unless otherwise indicated by us or agreed in writing, all delivery deadlines and delivery periods are nonbinding. Delivery periods start from the signing of the contract except where Buyer is obliged to make advance payment, in which case the delivery period shall start upon receipt by us of the performance owed by Buyer. Further, delivery periods start only after all preconditions for the fulfilment of the contract are met, especially after all details of the implementation are agreed. Timely delivery is subject to Buyer’s compliance with the agreed payment terms.
5.2) Early delivery and partial deliveries are permitted to an extent reasonably acceptable for Buyer.
5.3) In any event of force majeure or other unforeseeable circumstances, such as operational breakdowns, lawful strikes or lock-outs, import and export bans, government intervention etc., which temporarily hinder us through no fault of our own or imputable to us from delivering the goods by the deadline or within the period agreed upon with or without commitment, these deadlines/periods will be extended, including during the delay, in accordance with the duration of the hindrance caused by these circumstances. If such hindrance prevents performance for more than four months, either party may withdraw from the contract. If delivery becomes wholly or partially impossible or unacceptable as a result of such circumstances, we will to such extent be released from our delivery obligation and/or entitled to withdraw from the contract. Any statutory rights of withdrawal shall remain unaffected.
5.4) In any event of delay in delivery, Buyer may withdraw from the contract only after setting us a respite for delivery of at least four weeks.
5.5) In any event of delay in delivery we accept unlimited liability for cases of intent or gross negligence. In cases of ordinary negligence our liability shall be limited to damage foreseeable and characteristic for the contract but to a maximum of 5 % of the agreed price for the goods we are in default with.
5.6) In the event that we have not received at all or in due time supply of any goods ordered, we shall not be in default with the delivery to Buyer unless we are responsible for having received such supply with delay or not at all. We will be entitled to withdraw from the contract if it is established that we are not responsible for not having received supply of the goods ordered.

6.) Passing of risk
6.1) Unless agreed otherwise the goods will be shipped at Buyer’s expense and risk and the risk shall pass to Buyer upon handover of the consignment to the person in charge of transportation. If dispatch of the goods is delayed for reasons outside our control or if Buyer fails to accept the goods in due time although they were offered to him, the risk shall pass to Buyer upon service of the written notification that the goods are ready for dispatch. Any storage costs incurred after the passing of risk will be borne by Buyer.

7.) Reservation of title
7.1) The delivered goods shall remain our property until all claims under the contract as well as all other claims we may have subsequently acquired against Buyer in direct relation to the delivered goods, on whichever legal grounds, have been fully settled.
7.2) Further, the goods shall remain our property as goods subject to reservation of title until all other claims we may acquire against Buyer now or in future, on whichever legal grounds (including all unsettled balances from current account), have been settled. In the event of a current account the reserved goods serve to secure our unsettled balances.
7.3) Where the validity of this reservation of title is subject to any special conditions or formal requirements in Buyer’s jurisdiction, Buyer shall arrange for their fulfilment at his expense.
7.4) Buyer has the right to process and resell the goods in the ordinary course of business. The right of processing and resale will lapse if Buyer is in default with payment or has suspended payments not only temporarily. As long as we retain title to the reserved goods, we will have the right to revoke Buyer’s authorisation to process or resell the goods for legitimate reasons. Buyer herewith assigns to us any and all claims including ancillary rights he may acquire from the processing and resale of the goods. We do accept the assignation.
7.5) Buyer is authorised to collect the assigned claims until this authorisation is revoked. We may revoke the authorisation to collect the assigned claims for legitimate reasons. We are authorised to ourselves collect the claims but shall not do so as long as Buyer duly meets his payment obligations.
7.6) If Buyer fails to meet his payment obligations and we are therefore authorised to ourselves collect the claims, Buyer shall, on request, provide us with a list of all goods subject to our reservation of title, the assigned claims and the names and addresses of the debtors including the amount of the claims. On request Buyer will be obliged, and we will be entitled, to notify the debtors of the assignment of claims.
7.7) Any processing or alteration of the reserved goods will be carried out on our behalf and such that we are considered the manufacturer in accordance with Sec. 950 BGB. In the event of the reserved goods being processed, joined or combined by Buyer with other goods not owned by us, we will be entitled to co-ownership of the new product in accordance with the invoice value of the reserved goods relative to the invoice value of the other goods at the time of processing, joining or combining. We hereby offer to grant Buyer a contingent right to the joint owner-ship share that is created. Buyer herewith accepts this offer. If the reserved goods are sold together with other goods after processing, joining or combining, the assignment of the claim from the resale shall extend only to the amount of the invoice value of the goods delivered by us.
7.8) Buyer shall notify us in writing without delay of any third party attachments, e.g. execution measures, provide us with all information and documents required to protect our rights and notify such third party of our reservation of title.
7.9) If Buyer has suspended payments not only temporarily, petitions the opening of insolvency proceedings against his assets, or insolvency proceedings are opened against Buyer’s assets, Buyer, on our request, will be obliged to release to us any reserved goods still owned by us. Further, in the event of a breach of contract by Buyer, especially default in payment, we may demand that the reserved goods be released.
7.10) At Buyer’s request we, at our option, shall waive the reservation of title and/or release securities if Buyer has settled all claims relating to the reserved goods or if the realisable value of all securities granted by us by reservation of title, assignment by way of security and assignment of future claims exceeds the total sum of the claims against Buyer by more than 10 %.

8.) Notification of defects, warranty
8.1) If Buyer is a business within the meaning of the German Commercial Code, he shall inspect the goods promptly on delivery. Any obvious defects must be reported to us without delay but at the latest eight days after delivery. Any hidden defects must be reported to us without delay as well but at the latest eight days after their discovery. If no such notification is made the delivery will be deemed free from defects and approved.
8.2) If Buyer is not a business within the meaning of the German Commercial Code, he shall report any obvious defects at the latest two weeks after delivery of the goods any warranty will be excluded for such defects if they are not reported in due time.
8.3) Any notification of defects shall be made in writing and include a sample showing the reported defects as well as the delivery note and batch numbers.
8.4) Any returns must be insured by Buyer as they are not covered by our insurance we shall reimburse any such costs incurred as a result of justified complaints. Products subject to complaint shall be returned to us without delay at our request.
8.5) If Buyer reports a defect in due time in accordance with sec. 8.1 and 8.2 above, Buyer will be entitled to, at our option, rectification of the defect or delivery of a defect-free product at no charge.
8.6) Buyer agrees to indemnify us against any claims of third parties which are raised on grounds of improper processing by Buyer of the goods delivered by us.
8.7) The warranty shall be excluded for defects which were caused by normal wear and tear, excessive use or improper handling or which are a result of Buyer’s specifications.
8.8) With exemption of indemnity claims due to defects, all indemnity claims lapse twelve months after delivery of the goods to Buyer.
8.9) Buyer will be entitled to claim damages on the basis of defects only where our liability is not excluded or limited under sec. 9 of these GTC. Any further warranty claims or warranty claims other than those defined in this sec.8 are excluded.
8.10) All claims due to defects which we have fraudulently concealed or which are covered by any statutory guarantees or guarantees of durability remain valid.

9.) Liability
9.1) We accept unlimited liability for intent and gross negligence. In the event of a breach by ordinary negligence of a major obligation or an accessory obligation whose breach puts the achievement of the contractual purpose at risk or whose fulfilment is essential to the due and proper implementation of the contract and on whose fulfilment Buyer could reasonably rely on (hereinafter “essential accessory obligation”), our liability shall be limited to damage characteristic for the contract and foreseeable at the time of conclusion of the contract.
9.2) We accept no liability for a breach by ordinary negligence of accessory obligations which are not essential accessory obligations in accordance with sec. 9.1 above.
9.3) The exclusions of liability set out in sec. 9.1 and 9.2 above shall not apply to claims based on injuries to life, limb or health, tortious acts, the liability for claims under the Product Liability Act, in the event of a warranty as to the quality or durability of the goods or fraudulent concealment of defects in the goods.
9.4) Where our liability is excluded or limited, this applies also to the personal liability of our employees, other staff members and vicarious agents.
9.5) To the exception of claims based on tort, Buyer’s claims for damages for which liability is limited under this section shall become time-barred one year after the beginning of the statutory limitation period.

10.) Intellectual property rights, indemnification
10.1) If any third party raises justified claims against Buyer on grounds of infringement of intellectual property rights by the goods delivered by us, sec. 8 will apply by analogy. We shall defend, indemnify and hold harmless Buyer against all justified claims raised by third parties, provided that (i) we are notified thereof by Buyer in writing with-out delay, (ii) we may assume exclusive control of the defence against any such claim and all related settlement negotiations, and (iii) Buyer provides us with the necessary information and authorisations.

11.) Returns
11.1) Returns of defect-free goods are accepted on a voluntary basis only and are therefore subject to our prior written consent. Any such returns will be accepted only within one month after the invoice date and are subject to a handling fee of 5 % of the value of the goods.

12.) Plans, technical specifications
12.1) With regard to samples or other pieces manufactured by us on the basis of plans or technical specifications provided to us by Buyer, we accept no liability for defects or faults arising as a result of faults in Buyer’s plans or technical specifications unless we are responsible for the defect or fault. Any changes requested by Buyer by telephone are subject to Buyer’s written confirmation.
12.2) Any samples, drawings etc. which are part of our offer and are produced by us are for manufacturing purposes only. They remain our property and will not be delivered. Unless agreed otherwise in writing all tools for which Buyer pays a share of the tooling cost shall remain our property with no compensation for Buyer.

13.) Data protection
13.1) Buyer agrees to transmission of delivery address, order number, e-mail address and phone number to the respective freight forwarder or its agents or subcontractors for the purpose performing the obligations under the relevant shipping order. The above mentioned data is used for no other purpose.

When products are sold with a rebate and the rebate is paid directly to the customer by the manufacturer, the sales tax base is normally the full sales price of the product. Because the product is sold for the full retail price the retailer is compensated fully by the customer and the sales tax applies to the amount received. Because the rebate paid to the customer after the sale occurs, there is no sales tax impact caused by the rebate. Instant rebates applied at the point-of-sale are normally treated like manufacturers coupons and are taxed according to the state rules for those.

The rules on how sales tax applies to coupons, discounts, promotions, and rebates can get complicated and can vary widely by state. Sales discounts advertised as “percent off” or “dollar off” seem to have the most consistent treatment across the states with sales tax. When retailers start using unique and special promotions careful research should be pursued to determine what the sales tax rules are in the states where the retailer is registered for sales tax. The misapplication of sale tax to special promotions is a major audit issue for many retailers.

Schedule a time to look at your specific sales tax needs and learn about automation.

TaxJar makes sales tax simple so you don’t have to keep up with changing legislation or confusing discounts and promotions. Get started with TaxJar today!

Net of discount definition

There are two definitions of the net of discount term. They are:

A manufacturer's coupon is typically applied to the price of a product only after all other discounts have been applied to it, or "net of discounts." For example, a coupon offers 20% off the $100 retail price of a product, net of discounts. Other applicable discounts are a 10% Christmas discount and a 5% volume discount. Thus, the other two discounts are applied first to arrive at an $85 price for the product, after which the 20% coupon offer is applied, resulting in a $17 discount related to the coupon. This approach reduces the value of the coupon, costing the manufacturer less money in lost sales.

The amount that a supplier indicates on its invoice as payable if an early payment discount or other type of discount is taken. For example, an invoice might contain a $500 total amount payable, which is reduced to $480 net of an early payment discount, if the customer pays within ten days of the invoice date. The terminology used by the supplier might be a percentage discount from the full amount of the invoice, or it may be the actual dollar amount payable if the discount is taken.

Thus, the first definition of the term is more likely to apply to a consumer, while the latter situation is more likely to apply to a business transaction.

Payment Methods for International Transactions/Methods of Payment

A seller ships the goods and all the necessary shipping and commercial documents directly to a buyer. This buyer agrees to pay the seller’s invoice at a future date ( net 15 days, net 30 days or with a discount offered--for example, 1% if paid within 20 days of invoice date).

Documentary Collections

A documentary collection is a payment mechanism in which a seller uses a bank as his/her "agent" in collecting payment from a buyer located overseas. After shipping the goods, the seller submits a draft (a demand for payment) and the relevant shipping documents to the bank. The draft will include instructions to release the documents to the buyer upon the buyer’s payment or acceptance of the draft. The seller’s bank sends the documents, draft, and collection instructions to a branch or correspondent bank in the buyer’s country. This bank carries out the seller’s collection instructions and, upon receipt of payment from the buyer, remits payment to the seller’s bank for the credit of the seller.

Documentary collection procedures are uncomplicated. After shipping the goods, the exporter submits to the bank:

  • shipping documents, including the bill of lading conveying title to the goods, as well as other documents related to the shipment.
  • a draft, also called a bill of exchange, demanding payment from a buyer. Depending on the agreed terms of sale, this may be a sight draft, demanding payment on presentation, or a time draft, demanding payment at some stated future time after presentation or after the bill of lading date.
  • instructions to the bank as to how to handle the transaction. Note that a documentary collection requiring payment before the release of documents may sometimes be transacted without a sight draft. Under cash against documents (CAD) terms, the documents are released to a buyer against receipt of payment. CAD terms are generally used when the government of the importing country requires tax stamps affixed to drafts by eliminating the draft, both buyer and seller avoid stamp taxes.
  • release documents to a buyer upon payment of the sight draft, which is known as a documents against payment, or D/P collection or release documents to a buyer upon acceptance of the time draft, a documents against acceptance, or D/A collection.

The seller’s bank, called the remitting bank, sends the documents, draft, and instructions to one of its branches or correspondent banks in the buyer’s country. This bank, called the collecting or presenting bank, contacts the buyer and informs him/her that the documents have arrived and can be obtained when he/she complies with the payment terms, which may be documents against payment or documents against acceptance.

Documents against Acceptance (DA)

A buyer is required to "accept" a seller’s time draft, thus acknowledging obligation to pay at the specific future date. The time of payment occurs at maturity of an accepted time draft, 30, 60 or 90 days after date of acceptance or date of bill of lading.

Documents against Payment (DP)

A buyer is required to pay a seller’s sight draft in order to obtain shipping documents. Payment is made on presentation of the sight draft by a bank to the buyer, usually one or two weeks after shipment. Under D/P terms, the seller, through a bank acting as an agent, is able to retain control of the goods until the buyer pays. Under certain circumstances, such as to meet legal requirements of the importing country or to obtain a government permit for foreign exchange, the buyer will require possession of the documents before payment. The seller should inquire as to the practice in specific countries. Air shipments are often made under documentary bill collections. The buyer, as direct consignee of the non-negotiable air waybill, will be able to take possession of the goods before meeting his/her payment obligations.

Letter of Credit

A commercial letter of credit is, essentially, an agreement in international trade whereby a bank assumes a conditional obligation on behalf of its customer, a buyer, to make payment to a seller. Payment is conditional upon a seller’s compliance with the terms and conditions specified in the letter of credit. These terms and conditions require the seller to present stipulated documents, which are usually those required for transport, commercial, and official purposes ( bill of landing, commercial invoice, insurance certificate, consular invoice). Once the seller has complied with the documentary requirements of the letter of credit, prompt payment is secured. In effect, a bank in the letter of credit transaction substitutes its credit standing for that of the buyer. Thus, the seller, who is the beneficiary of the letter of credit, has the undertaking of a bank to pay when the terms and conditions of the credit have been complied with. On the other side, the buyer is assured that payment will not be made unless the seller meets the conditions stipulated in the letter of credit.

The buyer’s bank substitutes its creditworthiness for that of its customer and agrees to honor a seller’s demand for payment if that seller complies with all the requirements specified in the letter of credit.

Confirmed Letter of Credit

In addition to the standard letter of credit, this instrument carries the undertaking of a second bank, usually in the seller’s country, to honor the seller’s demand for payment upon presentation of documents specified in the credit.

A second bank, usually in the seller’s country, gives its undertaking to the letter of credit issued by the buyer’s bank and promises to pay the seller upon that party’s compliance with the terms and conditions of the credit.

If the seller does not want to lessen risk, this seller may require that the letter of credit be confirmed by a bank in his/her country (or in some third country). A bank that confirms the letter of credit adds its commitment to pay to the original credit. Since the seller can look to the confirming bank for payment, he/she is protected against the financial risk of the issuing bank and the political risk of the importing country. To the extent that the credit standing of the confirming bank is undoubted, this is the most favorable type of letter of credit from the seller’s point of view.

Advised Letter of Credit

A letter of credit issued by the buyer’s bank (the issuing bank) may be advised to a seller by a bank, usually in his country--called the advising bank--without any undertaking on the part of that bank, except that it must use reasonable care to check the authenticity of the credit which it advised.

As the issuing bank undertakes to pay the seller, the advised letter of credit relieves the seller of the financial risk of the buyer. However, as beneficiary of the advised credit, the seller is subject to the financial risk of the issuing bank, which may not be willing or able to make payment when due. In addition, the seller is subject to political risk of the importing country: that is, the risk that sovereign action of the government may block the transfer of funds regardless of the issuing bank’s ability or willingness to pay the credit.

Cash in Advance

The seller requires receipt of payment from the buyer before shipping goods. Payment may be made by wire-fund transfer from the buyer’s bank to the seller’s bank, or by company check, credit card, or other agreed upon means.

Advantages and Disadvantages

The purpose of a business taking purchase discounts is to reduce its costs. The downside of course is that the business must make payment earlier (10 days instead of 30 days in the above example) and will lose the use of the cash for an extra 20 days.

If we use the example above, the gain to the business of paying 1,470 20 days earlier than expected was the purchase discount of 30. The ‘interest rate’ for the 20 days is calculated as follows.

This is the rate for the use of the funds for 20 days, to convert this to an annual percentage rate (APR) we simply divide by 20 to convert it to a daily rate, and then multiply by 365.

By paying early and taking the payment discount the business effectively earns 37.23% on the funds it uses. Providing they have the funds or can borrow at a rate cheaper than 37.23% (in the above example), the business is better off borrowing and taking the discount.