AFM101 Chapter Notes - Chapter 7: Promissory Note, Net.
10 Jun 2018
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AFSA Education
2. Avoiding costs of providing credit directly to customers (for recordkeeping &
bad debts).
3. Lowering losses due to bad cheques.
4. Avoiding losses from fraudulent credit card sales.
5. Receiving money faster.
- Credit card company charges a fee for the service it provides.
o Credit Card Discount = Fee charge by the credit card company for its services.
- Example: Sales Revenue – credit card discounts = Net Sales (p. 348, textbook).
SALES DISCOUNTS TO BUSINESSES:
- Usually, these are credit sales on open account.
o No formal written promissory note indicating the amount owed to the company
by the customer.
- When company sells product to wholesaler on credit credit terms are printed on each
sales document and invoice (bill) sent to the customer.
- Credit terms are abbreviated using symbols.
o Example: n/20 If the full amount of the invoice is due within 20 das of the
invoice date, the credit term will be noted n/20. Here, n means net.
- Sales (Cash) Discount = Cash discount offered to encourage prompt payment of a trade
account receivable.
o Example: The credit term 2/10, n/30 means that the customer may deduct 2%
from the invoice amount if cash payment is made within 10 days of the date of
sale. If paid later, the full invoice amount is due within a maximum of 30 days.
- Early Payment Incentive: A/B, n/C.
o A = Discount percentage (%).
o B = # of days in discount period.
o C = Max credit period.
- Sales discounts are offered to encourage customers to pay more quickly. This provides
2 benefits for the company:
1. Prompt receipt of cash from customers reduces the necessity of borrowing money to
meet operating needs.
2. Since customers tend to pay invoices proving discounts first, sales discounts also
decrease the likelihood that a customer will run out of funds before company’s
invoice is paid.
- Companies record sales discounts taken by subtracting discount from sales if payment
was made within discount period (usual case).
o Example: Credit sales terms 2/10, n/30 and payment of $ 980.
Sales discount = 1,000 * 2% = 1,000 * 0.02 = $20.
Net Sales (payment) = Sales Revenue – Sales Discounts
Net Sales = $ 1,000 – 200 = $ 980.
- Note: Purpose & accounting of sales discounts and credit card discounts are similar.
o Both sales discounts & credit card discounts provide an attractive service to
customers and promote faster receipt of cash reduce recordkeeping costs
and minimize bad debts.
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Document Summary
Afsa education: avoiding costs of providing credit directly to customers (for recordkeeping & bad debts), lowering losses due to bad cheques, avoiding losses from fraudulent credit card sales, receiving money faster. Credit card company charges a fee for the service it provides: credit card discount = fee charge by the credit card company for its services. Example: sales revenue credit card discounts = net sales (p. 348, textbook). Usually, these are credit sales on open account: no formal written promissory note indicating the amount owed to the company by the customer. When company sells product to wholesaler on credit credit terms are printed on each sales document and invoice (bill) sent to the customer. Credit terms are abbreviated using symbols: example: n/20 if the full amount of the invoice is due within 20 das of the invoice date, the credit term will be noted n/20. If paid later, the full invoice amount is due within a maximum of 30 days.
