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Account payable
Accounts payable is an entity's short-term obligation
to pay suppliers for products and services, which the
entity purchased on credit
Accounts payable are the major source of unsecured
short-term financing for business firms.
The firms goal is to pay as slowly as possible without
damaging its credit rating

Account payable management
Cash discount
Trade discount
Quantity discount

Cash Discount
Businesses frequently offer cash discounts as a way to
encourage their business customers to pay their
invoice early
To encourage on time payment, companies offer an
incentive of a cash discount if the invoice is paid
within a specified period.
2/10 n/30 means take a 2% cash discount if paid
within 10 days; pay the net price if covered within 30

Cash Discount = Invoice Price Rate of Cash Discount
Use the complement to find the net
amount of an invoice
An invoice of $10,000 which reads 2/10 n/30
tells you that a discount of 2% is available if the
payment is made within 10 days.
To calculate the net amount directly, use the
complement of the discount (in this case, 0.98)
and multiply it by the total amount.
$10,000 x 0.98 = $9800 = net amount to be
Effective Rate of Interest

= (Cash discount/Amount of money used) X (Days in the accounting
year/ Net days Discount days) X 100
= ($200/$9800) x( 365/30 10) x 100
= (0.0204) x 18.25 X 100
= 37.23 %
ABC Lmtd. received a $1,248 bill for computer supplies
dated September 2 with sales terms of 2/10, 1/15, n/30. A
5% penalty is charged after 30 days. Find the amount due
for the following dates: September 12, September 15,
October 1, October 3.

September 12 (2% discount) = $1,223.04
September 15 (1% discount) = $1,235.52
October 1 (no discount) = $1,248.00
October 3 (5% penalty) = $1,310.40
Copyright 2009 Pearson
Prentice Hall. All rights
reserved. 15-8
Giving Up the Cash Discount
Figure 15.1
Trade discount
Trade discount: the amount of discount that the
wholesaler or retailer receives off the list price or the
difference between the list price and the net price
Net price: the price the manufacturer or retailer pays
or the list price minus the trade discount.

Discount rate: a percent of the list price.

Look at this example
Trade discount = rate x list price
Find the trade discount for a cd player that retails
at $120 and has a trade discount rate of 35%.

Trade discount = 0.35 x $120
Trade discount = $42
What does the $42 mean?
That the wholesaler or retailer will not pay $42 of
the $120 list price.
Find the net price of a desk that lists for $320 and
has a trade discount of 30%.

Trade discount = 0.30 x $320 = $96

Net price = List price Trade discount

Net price = $320 - $96 = $224
Trade discount series step by step
An item lists for $400 and has a discount of 30%.
$300 x 0.3 = $90; $400 - $90 = $210
An additional discount of 20% is taken on the
previous price.
$210 x 0.2 = $42; $210 - $42 = $168
An additional discount of 10% is taken on the
previous price.
$168 x 0.1 = $16.80; $168 - $16.80 = $151.20
$151.20 is the final price
Find the net price
Using the complement of the single trade discount

The complement=1- 0.3=0.7
The complement=1- 0.2=0.8
The complement=1- 0.1=0.9
Find the net price of an order with a list price of
$300 and a trade discount series of 30/20/10
Find the complement of each of the trade discount
They are 0.70, 0.80 and 0.90.
Multiply them together.(0.7 x 0.8 x 0.9)
The net decimal equivalent is 0.504
Apply the net decimal equivalent to the list price.
Invoice Price = 300 x 0.504 = $151.20
Quantity Discount
A price offered to buyers for placing large orders.
Offer discount to customers who purchase items in
large quantities.
It may be one time discount or cumulative discount.

Quantity Discount
Item number Quantity Unit cost
10010 1-99 $15.00
100-499 14.50
500-999 14.00