Unit 3 – Lesson 2

4. Cash Discounts
A cash discount is the amount of discount on the net price (invoice amount) that is offered by a seller to a
buyer to encourage early payment of the invoice.
Many businesses offer goods and services on credit.

Payment Terms

When you purchase an

item, you receive an
invoice that contains the
seller’s name, the
buyer’s name, invoice
date, and description of
items purchased.

Sometimes, the seller

allows the buyer to pay
at a later date and
specifies this through
their payment terms.

Customers get discounts

Item Description for making prompt
payments.

Payment Terms
5/10, n/30 Credit Period
Cash Discount Net price is due
within 30 days
Discount Period
5% discount if payment is
made within 10 days

End of 5% End of
Invoice Date Discount Period Credit Period
Dec 23
10 days

5% No Discount

30 Days

days
ex1 Aaron purchased stationary for his business and received an invoice for $3000 dated
January 1, 2010 with the following payment terms: 5/10, 2/25, n/45.

a) What amount will settle the invoice if paid on January 9th?

b) What amount will settle the invoice if paid on January 26th?

c) What amount will settle the invoice if paid on January 27th?

End of 5% End of 2% End of
Invoice Date Discount Period Discount Period Credit Period

Jan 1
10 days 15 days 20 days

5% 2% Discount No Discount

Jan 9th : discount Jan 26th : discount Jan 27th : discount

Jan 9th: N = L(1 ─ d)

Jan 26th: N = L(1 ─ d)

Jan 27th: N = L(1 ─ d)

ex2 Hannah purchased some office equipment and received an invoice for $5000 dated March 8th, 2010
with the following payment terms: 10/10, 5/25, n/45. What amount will settle the invoice on
(i) March 18th, (ii) March 31st, and (iii) April 2nd?
End of 10% End of 5% End of
Invoice Date Discount Period Discount Period Credit Period

Mar 8
10 days 15 days 20 days

10% 5% Discount No Discount

Mar 18th : discount Mar 31st : discount Apr 2nd : discount

Mar 18th Mar 31st Apr 2nd

N = L(1 ─ d) N = L(1 ─ d) N = L(1 ─ d)

Ordinary Dating
We have already worked with Ordinary dating.
5/10, n/30 Credit Period

Discount Rate Discount Period

End-of-Month Dating (E.O.M.)

When E.O.M. is included at the end of payment terms, the discount period and credit period start from
the end of the month.

For an invoice dated February 20th, with the following terms of payment: 5/10, n/30 E.O.M.
End of Month: End of 5% End of
Invoice Date Start of Credit Period Discount Period Credit Period
Feb 20
10 days 20 days

5% Discount No Discount

NOTE: If the credit period is not stated (ex 5/10, E.O.M.), it is understood that full
payment is expected within 20 days from the end of the discount period.
That is, 5/10, E.O.M. is understood to be the same as 5/10, n/30, E.O.M..

Receipt-of-Goods Dating (R.O.G.)

When R.O.G. is included at the end of payment terms, the discount period and credit period start from
the date of receipt of goods.

For an invoice dated March 15th, with goods received on March 23rd, and the following terms of
payment: 5/10, n/30 R.O.G.

Receipt of Goods: End of 5% End of

Invoice Date Start of Credit Period Discount Period Credit Period
Mar 15
10 days 20 days

5% Discount No Discount
ex3 An invoice dated Nov 22, 2010 for $1000 has payment terms: 2/10, n/30, E.O.M. What payment
will settle the invoice if it is paid on:
(i) November 28, (ii) December 06, or (iii) December 11?
2/10, n/30 E.O.M.
End of Month: End of 2% End of
Invoice Date Start of Credit Period Discount Period Credit Period
Nov 22
10 days 20 days

2% Discount No Discount

Nov 28th : discount Dec 6th: discount Dec 11th : discount

Nov 28th Dec 11th

N = L(1 ─ d) N = L(1 ─ d)

ex4 An invoice dated June 22, 2010 for $2000 has payment terms: 5/10, n/30, R.O.G. Goods were
received on June 30th. What payment will settle the invoice if it is paid on:
(i) July 10, or (ii) July 15?
5/10, n/30 R.O.G.
Receipt of Goods: End of 5% End of
Invoice Date Start of Credit Period Discount Period Credit Period
Jun 22
10 days 20 days

5% Discount No Discount

Jul 10th: discount Jul 15th : discount

Jul 10th Jul 15th

N = L(1 ─ d) N = L(1 ─ d)
Partial Payments
A partial payment is a portion of the invoice amount that a buyer pays within the discount period to
take advantage of a cash discount.
$5000 Total bill You bought office
The amount
supplies for $5000,
credited is
with payment terms
more than
10/15, n/30.
$2000, since a
discount is
applied to the
$2000 Amount paid You paid $2000 during
amount.
the discount period.

How much would you have to pay to settle the invoice?

Amount Credited = Amount Paid

(1 − d)

Amount Credited =

Amount left to pay after the discount period Total payment to settle the invoice

= =

= =
OR

Amount Credited = $2222.22

Credited with paying above $2000

Total payment to settle the invoice =

=

ex5 Caprice Industries purchased office furniture and received an invoice of $20,000 dated March 31 st
with terms 20/10, n/30. If they made a partial payment of $10,000 on April 10th and settled the
balance on April 25th, calculate the total amount paid for the furniture.

End of 20% End of

Invoice Date Discount Period Credit Period
Mar 31
10 days

20% No Discount

Apr 25th: balance paid

Apr 10th: discount
 Amount Paid
Amount Credited =
(1 − d)

Total amount paid OR Amount left to pay after the discount period
= =
= =

Total payment to settle the invoice

=
=

ex6 A software company purchased computers and received an invoice of $50,000 dated June 20th
with terms 10/10, 5/20, n/30. If they made a partial payment of $20,000 on June 25th, another
payment of $10,000 on July 7th, and settled the balance on July 15th, calculate the
a) the balance after the first payment,
b) the balance after the second payment,
c) total amount paid for the computers.

End of 10% End of

End of 5%
Invoice Date Discount Period Discount Period Credit Period

Jun 20
10 days 10 days 10 days
HOMEWORK:
10% 5% No Discount 1. Exercise 5.2 pg 179
#3 to 19, 23, 27, 29
Jul 15th
(odd #s)
Jul 7th: discount
Jun 25th: discount 2. Lab 6 #2 to 4

Amount Paid
a) Amount Credited on June 25th = (1 − d)

Balance after the 1st payment =

Amount Paid
b) Amount Credited on Jul 7th = (1 − d)
Balance after the 2nd payment =

c) Amount left to pay =

Total amount paid =

OR AC June 25 = AC July 7 =

Total amount paid =