Payment Terms

What are payment terms?

Payment terms are the conditions under which a buyer must pay a seller for goods or services.

They are typically specified on invoices and contracts, and they can vary depending on the industry, the relationship between the buyer and seller, and the size and complexity of the transaction.

How do payment terms impact a business?

Payment terms are important because they can impact the company’s cash flow, revenue recognition, and financial reporting.

Accountants need to be familiar with different types of payment terms and how to account for them in order to ensure that the company’s financial records are accurate and complete.

Common types of payment terms.

The most common types of payment terms include:

• Net 30: This means that the buyer must pay the seller within 30 days of the invoice date.
• Net 60: This means that the buyer must pay the seller within 60 days of the invoice date.
• Net 90: This means that the buyer must pay the seller within 90 days of the invoice date.
• 2/10, Net 30: This means that the buyer can take a 2% discount if they pay the seller within 10 days of the invoice date, otherwise the full amount is due within 30 days.
• COD (cash on delivery): This means that the buyer must pay the seller in cash at the time of delivery.

Other types of payment terms may include:

• Progress payments: These are payments that are made to the seller at different stages of a project.
• Retainers: These are payments that are made to the seller in advance of the delivery of goods or services.
• Net EOM (end of month): This means that the buyer must pay the seller within a certain number of days after the end of the month in which the invoice was issued.
• Due on receipt: This means that the buyer must pay the seller immediately upon receiving the invoice.

Accounting for payment terms.

The way that payment terms are accounted for will vary depending on the type of payment term and the company’s accounting policies. However, there are some general principles that apply to all payment terms:

• Revenue should be recognized when the buyer takes ownership of the goods or services and the seller has a reasonable expectation of receiving payment.
• Expenses should be recorded when the goods or services are received, even if the seller has not yet been paid.
• Accounts receivable should be recorded for the amount of the invoice that is still outstanding.
• Accounts payable should be recorded for the amount of the invoice that is still owed to the seller.

An example of payment terms.

The following example illustrates how to account for payment terms.

A company sells goods on net 30 terms. On January 1, 2023, the company sells goods to a customer for $1,000. The company would record the following journal entry:

The company would then recognize the revenue from the sale on January 1, 2023, even though the customer is not required to pay until February 1, 2023.

If the customer pays the invoice on February 1, 2023, the company would record the following journal entry:

Accountants need to be familiar with different types of payment terms and how to account for them in order to ensure that the company’s financial records are accurate and complete.