Question

How to interpret and use credit terms?

Answer 1

Basically Credit terms are nothing but the seller's payment requirements, that are to be met by the buyer in order to avail some benefit out of the transaction like discounts. It briefly tells about the amount and time of the payment to be made by the buyer. Seller provides for credit terms in order for the buyer to make an early payment, so that the seller can use the amount which otherwise would have been blocked in Debtors, else where to gain some interest out of it. Hnece he should also make sure that the discounts he offers to the buyers are not more than the interests that he could gain elsewhere,due to the early payment by the buyer.

When the terms say , 2/10,n/30, it means, if the amount is paid by the buyer within ten days, he can get a discount of 2% on his payment,and no discount if he takes more than 10 days.