What is a Purchase Discount?

Purchase Discount

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Purchase Discount

A purchase discount, often called a sales discount, trade discount, or cash discount, is an incentive that a seller offers to a buyer for paying an invoice earlier than the scheduled due date. It’s a reduction in the amount owed by the customer if they pay their invoice within a specified period of time.

The discount is usually expressed in terms like “2/10, net 30.” This means that the buyer will get a 2% discount if they pay within 10 days, and the full (net) amount of the invoice is due within 30 days.

This kind of discount is used as a method to improve cash flow and to incentivize quicker payments. From the buyer’s perspective, it’s an opportunity to reduce the cost of goods or services.

Example of a Purchase Discount

Imagine a company, Company A, orders goods from Company B. The total order comes to $1,000, and the terms are 2/10, net 30.

This means if Company A pays the invoice within 10 days, they can take a 2% discount off the total order amount.

So, within 10 days:

  • Discount: 2% of $1,000 = $20
  • Payment: $1,000 – $20 = $980

So, if Company A pays the invoice within 10 days, they only have to pay $980 instead of $1,000, saving $20. If Company A doesn’t pay within 10 days, they must pay the full amount of $1,000 within 30 days.

This practice helps Company B to get their money more quickly and helps Company A to reduce their costs.

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