As a small business owner, you must be aware that accounts payable is actually the overall amount you are obligated to pay to your suppliers/dealers who have allowed deferred payment arrangements to you for buying merchandise or supplies. Thus, you’re required to count in any sort of pertinent discounts while paying off the accounts payable balance in order to fix up the amount to be paid as well as to record that in your bookkeeping system.
The accounts payable is listed in the current liabilities part of the balance sheet. All of the unsettled and unpaid invoices are included in this amount. Sometimes, a discount may be offered by the supplier on an invoice in order to entice the business to settle the amount early. To assess the most appropriate time to settle a certain invoice, it is important that you choose whether it is advantageous to go for an early payment and get discounts, or to save your money and pay far along.
Generally, the date of invoice, credit terms and outstanding balance is listed on an invoice. At times, the supplier can mention his credit conditions on his invoice; for instance, as “2/15, net 45”. This denotes that the supplier is offering you a “2” percent discount for paying off the amount within 15 days of the invoice date. However, if you are unable to pay in 15 days, you’re required to settle the full amount within 45 days from the date of invoice.
Calculation of Payment
When you choose to pay the balance ahead of time with the intention to avail the discount, multiply the discount percentage by the invoice’s outstanding balance for determining the discount. Now minus the discount from your outstanding balance and pay the calculated amount. Though, if you decide to make the payment after the time limit of the discount then just pay the unsettled amount mentioned on the invoice. For instance, if you opt for a discount on a Rs.60,000 balance through credit conditions 2/10, net 30, multiply 0.02 by Rs.60,000. The discount offered is Rs.1200. Now subtract Rs.1200 from Rs.60,000 to calculate the payment amount, which is Rs.58,800.
Once you are done paying off, debit the entire amount on the invoice to the records of your accounts payable. This lessens the balance of account payable by the owed amount. Now, the amount in the cash account is required to be credited. This credit diminishes the cash or asset account. However, if you have availed the discount, the discounted amount should be credited to the account of purchase discounts. So, if we use the above mentioned example, debit Rs.60,000 to accounts payable, then credit Rs. 58,800 to cash and credit Rs.1200 to purchase discounts.
This all seems a bit complicated to handle. However, there is a solution. LedgerMax is one amazing accounting software that allows you to receive payments from the customers and record them without any hassle. This is how LedgerMax works: