Definition: A discount period is the amount of time a cash discount is available for a customer to make a reduced cash payment. In other words, this is the time period that a vendor is willing to reduce the price of a product if the customer will pay for it in cash.
What Does Discount Period Mean?
Cash discounts are common in almost all industries. Vendors extend credit terms to customers in hopes to increase their sales. Then they offer quick pay or cash discounts to the customers to try to get them to pay for their credit sales early before the full amount is due. Vendors like this arrangement because they receive cash faster and increase their cash flow. Customers, on the other hand, like it because they receive a sales discount for their purchase.
Discount period vary from industry to industry and from product to product. The most common discount periods last for 10 days. Let’s take a look at an example.
Example
Tim’s Golf store purchases clubs from Nike every few months to sell to its customers. Nike usually offers Tim a 2% discount if he pays the entire invoice in ten days. The full invoice will be due in 30 days if Tim choices not to take advantage of the discount. This is one of the most common discount arrangements and is traditionally referred to as a 2/10 n/30 or 2/10 net/30 trade discount.
If Tim has the cash flow to pay the entire invoice in ten days, he can reduce his inventory costs by 2 percent. Tim can either record this inventory purchase using the net method or the gross method to account for the discount.
The net method records the purchase as if the discount was automatically taken. The gross method, on the other hand, records the sale assuming the discount wasn’t taken.
