Example of Early Payment Discount

Example of Early Payment Discount

The discount offered on the early payment to encourage customer for early payment. The early payment by the customer improves the liquidity position of the organization it also reduces risk of default associated with the unpaid amount. Discount allowed on early payment is expense for the organization.

The terms of early payment is normally explained in short form i.e. 2/20, net 60. It means that a discount of 2% will be allowed if payment is made within 20 days instead of sixty days.

Example

ABC & Co made sales of $ 1000 on credit to ABC & Co and early payment discount offered @ 2%.

Solution

1. The entry at the time of sales would be as under

Date	Particulars	Dr.	Cr.
	ABC & Co a/c	1,000
	Sales a/c		1000

2. The following entry would be recorded if Mr. A avails the discount and makes early payment.

Date	Particulars	Dr.	Cr.
	Discount a/c	20
	Cash a/c	980
	ABC & Co		1000