In plain English
Terms of 2/10 net 30 mean a 2% discount if paid within 10 days, otherwise full amount in 30.
Record the discount when you take it.
Why it matters
Early payment discounts are a choice between keeping cash longer or paying less. When a vendor offers terms like 2/10 net 30, skipping the discount can be an expensive way to borrow for a few weeks. If the discount is not recorded, your expenses look higher than they were and the savings are invisible.
Tracking discounts taken also shows whether your payment process is fast enough to catch them.
Worked example
A $1,800 invoice on 2/10 net 30 terms paid within 10 days saves $1,800 x 2% = $36, so you pay $1,764 instead of $1,800.
How to handle it
- Enter vendor terms in each vendor record so bills show their discount date.
- Review open bills by discount date during each payment run.
- When you pay within the window, record the payment at the discounted amount and post the difference to a discount account or reduce the original cost account.
- Run a report of discounts taken at year end to see the savings.
Common mistakes
- Paying the discounted amount but leaving the bill showing a small unpaid balance, which clutters payables.
- Taking the discount after the window closed, which can upset the vendor and create a dispute.
- Recording discounts as income instead of a reduction of cost, which inflates both revenue and expenses.
Not the same as: Credit memo
A purchase discount is a reduction you earn by paying early. A credit memo from a vendor is a reduction for something else, such as a return or a billing error, and has nothing to do with payment timing. See Credit memo.
Go deeper
- Accounts Payable Process for Small Businesses: A practical accounts payable process: receiving bills, approving, coding, scheduling payment and avoiding duplicate payments or missed due dates.
Try it
Related terms
- Retainage: A percentage of a construction or project payment held back until work is complete.
- Retained earnings: The profit a business has kept over time, after distributions, rather than paid out.
- Prepaid expense: A cost paid in advance that is recorded as an asset and expensed over the period it covers.
Common questions
What is a purchase discount?
A price reduction a vendor gives for paying early, such as 2/10 net 30.
Can you give an example of purchase discount?
A $1,800 invoice on 2/10 net 30 terms paid within 10 days saves $1,800 x 2% = $36, so you pay $1,764 instead of $1,800.
Is it worth paying early to get a small discount?
Often yes, because a small percentage saved over a few weeks can be worth more than keeping the cash that long. It depends on whether you have the cash and what else you need it for.
How do I record a discount on inventory purchases?
Many businesses reduce the cost of the inventory or record it to a purchase discounts account that offsets cost of goods sold. Pick one method and use it consistently.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.