On July 1, a company receives an invoice of $800 with the terms 1/10 and net 30.
The correct answer and explanation is:
Correct Answer:
If the company pays the invoice within 10 days (by July 11), they will receive a 1% discount, so the amount payable is:
$800 × 0.99 = $792
If the company pays after 10 days but before 30 days (by July 31), they must pay the full $800.
Explanation (300 words):
The invoice terms “1/10, net 30” are a common form of credit terms used in accounting and business transactions. These terms describe the payment period and discount available:
- “1/10” means that the buyer can take a 1% discount on the invoice total if payment is made within 10 days from the invoice date.
- “Net 30” means that the full amount is due within 30 days, regardless of whether the discount is taken.
In this scenario, the invoice is dated July 1, and the total amount is $800. The buyer has two options:
- Take the Discount:
- Pay within 10 days (by July 11).
- Receive a 1% discount:
1% of $800 = $8
Amount payable = $800 – $8 = $792
- Pay Full Price:
- Pay after July 11 but no later than July 31.
- No discount is applied.
- Amount payable = $800
Why Use Such Terms?
Sellers offer discounts like “1/10, net 30” to encourage early payment, improving cash flow and reducing the risk of late or missed payments. Buyers may take the discount to save money, as a 1% discount in 10 days is equivalent to a very high annual return if calculated in financial terms.
Decision Making:
From a financial perspective, if the buyer has enough cash, it is generally advantageous to take the discount. Saving $8 on an $800 bill is a 1% saving for just paying 20 days earlier than the final due date. Over time, these savings can add up significantly.
So, the correct amount payable depends on when the invoice is paid.