What is 2/10 Net 30?
The term 2/10 net 30 means the supplier or seller will give additional 2% discount to the purchaser if the purchaser pays the due amount within 10 days from the date of purchase of goods instead of taking full credit period of 30 days. For example, if someone has purchased goods costing $100 from a store then he has to pay only $98 if paid within 10 days of purchase otherwise $100 will be paid within a total period of 30 days.
In other words, it can be generally seen that the supplier gives some credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy. to the purchaser to pay the dues, so to recover those dues earlier, this scheme came into light, and the supplier offers an additional 2% discount to the purchaser for early payment of dues.
How to Calculate 2/10 Net 30?
Step 1: Calculate the total amount of receivables on which we want to calculate the amount of discount to be given.
Step 2: Calculate the amount of discount to be given using the below-mentioned formula if the payment is made within 10 days by the purchaser:
Step 3: Finally, the formula for 2/10 net 30 is as follows:
Amount to be received if paid within 10 days = Total amount of receivables calculated in step 1 above – the amount of discount to be given as calculated in step 2 above. Mathematically it is represented as:
Examples of 2/10 net 30
ABC Inc. has sold material costing $100,000 on 2/10 net 30 on 01.04.2020 to Mr. X. Now, ABC Inc wants to know the difference in the number of receivables in both the situations, i.e., exercising the option of payment within 10 days and not exercising the option of early payment discount. The calculation of both the cases using the steps mentioned above is as follows:
Step 1: Calculate the total amount of receivables, i.e., Cost of Material of $100,000.
Step 2: Calculate the amount of discount if the payment is made within 10 days by the purchaser:
Discount = 100000 * 2 = 2000
Step 3: Amount to be received if paid within 10 days:
- = $(100,000 less 2% of 100,000)
- = $(100,000 – 2,000)
- = $98,000
In case a full credit period of 30 days is utilized by the purchaser, then the purchaser has to pay $100,000 within 30 days from the date of purchase to the entity.
PQR Inc. has sold material costing $1,500,000, other goods costing $532,500, and some other amounts of receivables of $1,117,500 are also due on 2/10 net 30 on 01.10.2020 to RST Inc. Now, PQR Inc wants to know the difference in the number of receivables in both the situations, i.e., exercising the option of payment within 10 days and not exercising the option of early payment discount.
The calculation of both cases is as follows:
Step 1: Calculate the total amount of receivables i.e.
- Cost of Material of $1,500,000
- Other Goods of $532,500
- Other Receivables of $1,117,500
- Total Receivables = $(1,500,000 + 532,500 + 1,117,500)=$3,150,000
Step 2: Calculating the amount of discount if the payment is made within 10 days by the purchaser:
Discount = 3,150,000 * 2 = 63,000.
Step 3: Amount to be received if paid within 10 days:
- = Total Receivables – Total Discount
- = 3,150,000 – 63,000
- = $3,087,000.
Difference between 2/10 Net 30 and Net 30
- In 2/10 net 30, the purchaser has been provided with an option to pay within 10 days and enjoy an additional 2% discount, but on the other hand, there is no such privilege in the Net 30 concept.
- The concept of Net 30 is used by established and renowned organizations who do has a fear of losing customers, but on the other hand, the additional advantage of 2% is provided with the sake of increasing customer base.
- The liquid funds of the business are available with the entity for a longer period so that the requirement of working capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)" may easily be managed.
- The entity can also invest and earn short term returns thereupon if in the situation of.
- It helps in setting new credit standards to the industry in which an entity operates.
- It creates difficulty for the business to survive or to manage its operations in a situation where an economy is in a cash crisis condition.
- Sometimes it is seen that the new entrants are using this technique to grab the potential customers by providing higher early payment discounts without analyzing the impact thereof in the long run.
- Sometimes it gives a bad impression of an entity in the mind of the customer that they are in the position of liquidity crunch or want to liquidate their business very soon by recovering all the outstanding from the market.
2/10 net 30 is a concept that is generally used in industry where the working capital requirement is generally high, and the funds are required on a daily basis to manage the day to day operations of a business. It is basically used to recover trade payables at the earliest by giving early payment discounts, which generally costs less as compared to the cost of funds that are otherwise used by an entity to manage their working capital requirement.
This has been a guide to what is 2/10 net 30 and its meaning. Here we discuss formula to calculate 2/10 Net 30 along with examples, advantages, and disadvantages. You can learn more about from the following articles –