What is an early payment discount?
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Early payment discount is a discount allowed by the seller to its debtors for quick payment. The early payment discount is also known as cash discount, Seller often refer this discount as sales discount where as buyer refer this as early payment discount. Early payment discount motivate customers to make quick payment earlier than credit period agreed.
Example of early payment discount.
An example credit term agreed between the seller and buyer is 2/10 net 20. This meaning that allowed 20 days for making payment but 2% early payment discount or cash discount will be allowed if paid within 20 days.
Benefits of early payment discount.
This is beneficial for both buyer and seller. For seller the fund available through quick payment is cheaper than bank overdraft. For buyers he can sell the product at list price more margin than billed price.
Accounting of early payment discount
Early payment discount is accounted. As billing has already been made at list price.For buyer early payment discount is an Income. He may credit discount and debit seller account to remove the balance stand at his credit.
As far as seller is concerned early payment discount is an expense. Hence debit discount account and credit customer account to write of his balance standing at debit.