27 thoughts on “Buy Reductions and Low cost Phrases – Ch. 5 Video 2

  1. my transaction says purchased goods on account 70,000 with terms: less 10,000 n/40, 5/15 and FOB shipping point….. im confused on how i should record this

  2. How then would you record it under the Accounts Payable Subsidiary Ledger? Because if the creditor was owed $1500 (a credit) but received the discounted amount of $1470 (a debit), how would the A/P subsidiary ledger balance to reflect nothing is outstanding?

  3. Great video, this is also how I explain it to my supply chain students:
    Read: Do you know what this means? 2/10 net 30 (now employers want you to be Finaciers!!??) The good news is that they will pay more for more strategic skills…
    A Purchase Order is a contract between a buyer and supplier. Over half of our students get their first full-time jobs in procurement/purchasing/sourcing in a buyer type of role. One of those job responsibilities will be to negotiate payment terms upon which you pay a supplier. When you pay for a product or service in your own personal life, you typically pay for it upon receipt or delivery of the good/service. However, in business-to-business transactions, the supplier usually does not get paid right away. Usually, the buyer will receive the goods/parts/material first, and then the buyer will pay for it later, sometimes very later. Buying organizations are often cash strapped, or simply put, they are cheap and greedy. Buyers will try to negotiate not paying for something as long as 30, 60, 90, 120 days after they actually get the stuff. Suppliers are not thrilled with this, but if you trust the buyer and know that you will eventually get paid, why not? Usually, large buying organizations have this kind of leverage over smaller suppliers. So, what is the current standard protocol for payment terms with buyers and suppliers? See below.
    • 2/10 net 30
    – 2% discount if paid within 10 days, full payment required within 30 days
    So, if you buy $100 worth of parts from a supplier, you have to pay them at the latest, $100 30 days after you get the parts. However, if you pay them within ten days of getting the parts, you only pay $98. Here is the thinking part of this reading assignment. I think there are a lot of VP’s of SCM and VP’s of Finance that are not talking to each other very much. My impression is that most companies are obsessed with negotiating payment terms with net 30, 60, 90, and 120 days. This makes sense to me if a company is cash strapped, but I do not think most are. It also makes sense if you are broke and would have to borrow from a bank to pay the supplier (and if the cost of borrowing is really high). So, wait as long as possible to pay the supplier with our own cash (and hopefully you can make enough money in 30-120 days to pay your suppliers). If you cannot, then you have major cash flow issues and your margins are probably too tight to keep you in business. In which case, the bank might not even loan you any money.
    I think most companies have some cash on the sidelines (The Great Recession of 2008) and why would you sit on that cash for 30, 60, 90, and 120 days? Why not pay your suppliers early and make cash (in the form of discounts – a dollar saved is the same as adding one dollar of pre-tax profit to your company’s bottom line). You might argue that keeping the money in the bank and collecting interest on it makes you more than the price discount that the supplier is willing to give you for early payment. However, here is my point – have you seen how low interest rates are and how low the cost of borrowing is in America? They are at record lows! You can borrow money to buy a house and only pay 2-3% in interest today. So, what is the strategic SCM opportunity here? How about this:
    • 4/10 net 30
    – 4% discount if paid within 10 days, payment required within 30 days
    Let’s say you could actually negotiate these payment terms with a supplier, which I think they would go for if they could get their money sooner, especially if you are a buyer that does not pay them until 30, 60, 90, or 120 days out. As a buyer, even if you did not have the cash to pay them within 10 days, couldn’t you even borrow money from a bank to pay early? You still come out ahead because your cost of borrowing from the bank (1-3%) is less than the discount given to you by the supplier (4%). I also bet you there a lot of banks out there that would do all of this for you (all you have to do is sit back and enjoy the cost savings, and look like a superstar to your boss).
    SCM is a very cross-functional discipline. Effective SCM requires working with your suppliers, their suppliers, your customers, their customers, and internally with engineering, sales/marketing, and even finance. For the first time in American history, interest rates and the cost of borrowing is at record lows, combined with money actually out there in the system to be borrowed. I personally feel corporate America (on the procurement side) is leaving money on the table with its antiquated payment terms with suppliers. I hope this makes sense to you. Please let me know if not. Thank you. Sime

    Dr. Sime (Sheema) Curkovic, Ph.D., Valluzzo & Lee Honors College Faculty Fellow
    Professor, Operations/Supply Chain Management
    Western Michigan University, Haworth College of Business
    Schneider Hall Room 3246, Kalamazoo, MI 49008-5429
    Tel.: 269.387.5413; E-Mail: [email protected]wmich.edu
    "Better, faster, cheaper"; http://www.wmich.edu/supplychain
    "WMU Integrated Supply Management (ISM)…Nation's best undergraduate SCM program (Gartner 2014); 2nd in SCM technology (SoftwareAdvice 2015); 2nd in top global SCM talent (SCM World 2017)
    Vitae: http://www.wmich.edu/sites/default/files/curriculum-vitae/CurkovicVitae2017_0.pdf
    Sample Lectures & Should You Major in Supply Chain Management?

  4. okay.! so I am confused a Lil bit.. because in Indian Accounts if we get a discount on any purchased item we do put it on credit side but the account name we write is discount received. and I believe everyone here knows that discount received is a type of income for your business that's why we write it on the credit side because Income is Credit….. now can anyone explain to me why it is an inventory account.? For Example: if I purchased an inventory in credit and I pay the money within 10 days am getting a 2% discount. after I paid the money the journal would be like this
    Creditor A/c Dr. xx
    to Cash A/c xx
    to discount received A/c xx
    and before that, the journal should look like this
    inventory A/c Dr. xx
    to creditors A/c xx
    but here our Sir is saying that it would be inventory A/c. How and why.? please I didn't get it

  5. Thank you hero
    thank you 🙏🏻
    I was really struggling
    for real
    about the discount terms and how to write the entry and also about the FOB destination and shipping point
    you saved my life
    I'll now go and return to the war I'm fighting in
    this definitely gave me power
    I'm going to win
    good bye and thank you, hero 🙏🏻

  6. An invoice for $7,500 dated March 5, terms 4/10, net 60, was partially paid on March 10 such that the balanceowing on the invoice was reduced to $2,500. What was the amount of payment on March 10? I keep getting $4,800 but the answer says $4,750. Please help

  7. I love your videos. You explain it so much better! I use you as my study tool for my accounting tests. Please keep doing what your doing! 🙂

  8. What if you don't pay after 30 days? I just don't get why the 30's there because you obviously pay the full amount asap after missing the 10 day discount. Guess what I'm trying to say is you'd pay the full amount on days 11-30 so what's the reason for the 30? Is interest charged after that?

  9. i finally understand this! THANK YOU SO MUCH! I have my final exam later on today and i'm just going over my notes, i hope i remember this on the exam.

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