Carefully review credit terms

Oct 13, 2025 by recoveryshake.com 18 views

Purchasing Merchandise from PeopleFirst Corp: A Comprehensive Guide to Accounting and Credit Terms

Understanding the Basics of Credit Terms

When purchasing merchandise from a supplier, it's essential to understand the credit terms associated with the transaction. In this article, we'll delve into the details of purchasing merchandise from PeopleFirst Corp. with credit terms of 1/10, n/30, and explore the accounting implications of this transaction.

Purchasing Merchandise from PeopleFirst Corp

On March 19, our company purchased merchandise worth $340 from PeopleFirst Corp. with credit terms of 1/10, n/30. This means that we have the option to pay 10% of the invoice amount within 10 days to receive a 2% discount, or pay the full amount within 30 days.

FOB Destination: Understanding the Shipping Terms

The invoice also specifies that the merchandise is shipped FOB (Free on Board) destination. This means that the risk of loss or damage to the merchandise passes to the buyer (our company) once the goods are delivered to the destination. As a result, we are responsible for any damage or loss that occurs during transit.

Accounting for the Transaction

To account for this transaction, we need to record the purchase of merchandise as a debit to the inventory account, and the payment of the invoice as a credit to the accounts payable account. The journal entry for this transaction would be:

Debit: Inventory $340 Credit: Accounts Payable $340

Discount Terms: 1/10, n/30

The credit terms of 1/10, n/30 offer us two options for payment:

Option 1: Pay within 10 days to receive a 2% discount If we pay the invoice within 10 days, we can take advantage of a 2% discount on the total amount. This would reduce the amount we need to pay by $6.80 (2% of $340).
Option 2: Pay within 30 days without a discount If we choose not to take the discount, we can pay the full amount of $340 within 30 days.

Journal Entry for Payment within 10 Days

If we decide to pay the invoice within 10 days, the journal entry would be:

Debit: Cash $323.20 (340 - 16.80) Credit: Accounts Payable $323.20

Journal Entry for Payment within 30 Days

If we choose to pay the full amount within 30 days, the journal entry would be:

Debit: Cash $340 Credit: Accounts Payable $340

Conclusion

Understanding the Importance of Credit Terms

Credit terms play a crucial role in business transactions, as they can significantly impact the cash flow and profitability of a company. By understanding the credit terms associated with a purchase, businesses can make informed decisions about payment options and take advantage of discounts or other benefits.

Common Credit Terms

Some common credit terms include:

1/10, n/30: This term offers a 2% discount for payment within 10 days, and the full amount is due within 30 days.
2/10, n/60: This term offers a 2% discount for payment within 10 days, and a 1% discount for payment within 30 days, with the full amount due within 60 days.
Net 30: This term means that the full amount is due within 30 days, with no discount offered.

Best Practices for Managing Credit Terms

To effectively manage credit terms, businesses should:

Carefully review credit terms: Before accepting credit terms, businesses should carefully review the terms and conditions to ensure they understand the payment options and any associated discounts or penalties.
Choose the right payment option: Businesses should choose the payment option that best suits their business needs, taking into account the cash flow and profitability implications of each option.
Monitor and track payments: Businesses should regularly monitor and track payments to ensure that they are meeting their payment obligations and taking advantage of any available discounts.

Conclusion

In conclusion, purchasing merchandise from PeopleFirst Corp. with credit terms of 1/10, n/30 requires a thorough understanding of the accounting implications and the shipping terms. By recording the purchase of merchandise as a debit to the inventory account and the payment of the invoice as a credit to the accounts payable account, we can accurately reflect the transaction in our financial records. Additionally, we must consider the discount terms and choose the option that best suits our business needs. By understanding the importance of credit terms and following best practices for managing credit terms, businesses can make informed decisions about payment options and take advantage of discounts or other benefits.
Purchasing Merchandise from PeopleFirst Corp: A Comprehensive Guide to Accounting and Credit Terms

Q&A: Understanding Credit Terms and Accounting Implications

In our previous article, we explored the details of purchasing merchandise from PeopleFirst Corp. with credit terms of 1/10, n/30. In this article, we'll answer some frequently asked questions about credit terms and accounting implications.

Q: What is the difference between FOB destination and FOB shipping point?

A: FOB (Free on Board) destination means that the risk of loss or damage to the merchandise passes to the buyer (our company) once the goods are delivered to the destination. FOB shipping point, on the other hand, means that the risk of loss or damage to the merchandise passes to the seller (PeopleFirst Corp.) once the goods are shipped from the shipping point.

Q: What is the purpose of the 1/10, n/30 credit term?

A: The 1/10, n/30 credit term offers a 2% discount for payment within 10 days, and the full amount is due within 30 days. This term is designed to incentivize the buyer to pay the invoice quickly, while also providing flexibility in case the buyer needs more time to pay.

Q: How do I record the purchase of merchandise as a debit to the inventory account?

A: To record the purchase of merchandise as a debit to the inventory account, you would use the following journal entry:

Debit: Inventory $340 Credit: Accounts Payable $340

Q: What is the difference between a discount and a penalty?

A: A discount is a reduction in the amount owed, while a penalty is a fine or additional fee imposed for late payment. In the case of the 1/10, n/30 credit term, the 2% discount is a reduction in the amount owed if the buyer pays within 10 days.

Q: Can I negotiate the credit terms with the supplier?

A: Yes, you can negotiate the credit terms with the supplier. However, be aware that the supplier may not be willing to change the credit terms, and you should carefully review the terms and conditions before accepting them.

Q: How do I track and monitor payments to ensure I'm meeting my payment obligations?

A: To track and monitor payments, you can use a payment tracking system or spreadsheet to keep a record of all payments made. You should also regularly review your accounts payable and accounts receivable to ensure that you're meeting your payment obligations.

Q: What are some common credit terms and their implications?

A: Some common credit terms include:

1/10, n/30: This term offers a 2% discount for payment within 10 days, and the full amount is due within 30 days.
2/10, n/60: This term offers a 2% discount for payment within 10 days, and a 1% discount for payment within 30 days, with the full amount due within 60 days.
Net 30: This term means that the full amount is due within 30 days, with no discount offered.

Q: How do I choose the right payment option for my business?

A: To choose the right payment option for your business, you should consider the cash flow and profitability implications of each option. You should also carefully review the credit terms and conditions to ensure that you understand the payment options and any associated discounts or penalties.

Conclusion