Payment Terms

(noun)

Forms of trade credit which specify that the net amount (the total outstanding on the invoice) is expected to be payment received in full 10, 15, 30, or 60 days after the goods are dispatched by the seller, or 10, 15, 30 or 60 days after the service is completed. Net 30 or Net 60 terms are often coupled with a credit for early payment.

Related Terms

Examples of Payment Terms in the following topics:

  • Classifying Receivables

    • In turn, the customer must pay it within an established time frame, which is called the credit terms or payment terms.
    • An example of a common payment term is Net 30, which means that payment is due at the end of 30 days from the date of invoice.
    • To encourage this, businesses can offer a discount for early payment.
    • Other common payment terms include Net 45, Net 60, and 30 days end of month.
    • On a company's balance sheet, receivables can be classified as accounts receivables or trade debtors, bills receivable, and other receivables (loans, settlement amounts due for non-current asset sales, rent receivables, term deposits).

  • Activities to Manage Receivables

    • In most business entities, accounts receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer, who, in turn, must pay it within an established time-frame, called credit terms or payment terms.
    • An example of a common payment term is Net 30, which means that payment is due at the end of 30 days from the date of invoice.
    • Businesses can offer a discount for early payment.
    • Other common payment terms include Net 45, Net 60, and 30 days end of month.

  • Accounts Payable

    • Suppliers offer various payment terms for an invoice .
    • A/P payment terms may include the offer of a cash discount for paying an invoice within a defined number of days.
    • For example, the 2/10 Net 30 term means that the seller will deduct 2% from the invoice total if payment is made within 10 days and the invoice must be paid within 30 days.
    • The three-way match can be modified to expedite payments.
    • Differentiate between trade and expense payables and give examples of common accounts-payable terms

  • Factors Affecting the Price of a Bond

    • A bond's book value is affected by its term, face value, coupon rate, and discount rate.
    • Generally, the person who holds the actual bond document is the one with the right to receive payment.
    • Sometimes a business will make interest payments during the term of the bond, but a term ends when all of the payments associated with the bond are completed.
    • These interest payments are generally paid periodically during the bond's term, although some bonds pay all the interest it owes at the end of the period.
    • To calculate the present value, each payment is adjusted using the discount rate.

  • Notes Payable

    • A promissory note is a negotiable instrument, where one party (the maker or issuer) makes, under specific terms, an unconditional promise in writing to pay a determined sum of money to the other (the payee), either at a fixed or determinable future time or on demand by the payee.
    • The terms of a note usually include the principal amount, interest rate (if applicable), parties involved, date, terms of repayment (which may include interest), and maturity date.
    • Usually the lender will only give the borrower a few days notice before the payment is due.
    • The note payable amount can include the principal as well as the interest payment amounts due.
    • If periodic payments are made throughout the term of the note, the payments will reduce the notes payable balance.

  • Reporting Long-Term Liabilities

    • Let's say John, a freshman in college, obtains a student loan for 25,000 and the bank does not require loan payments until 6 months after he graduates, i.e. 4.5 years after the loan was originated.
    • This is an example of a long-term liability.
    • Let's say Company X obtains a 100,000 Note Payable that requires 5 annual payments of 20,000 starting 1/1/14.
    • Since Company X is required to make a 20,000 payment on 1/1/14, which is less than one year away, a current liability of 20,000 and a long-term liability of 80,000 would be reported on its balance sheet as of 12/31/13.
    • See below for the balance sheet reporting treatment of the current and long-term liability portions of the Note Payable from initiation to final payment.

  • Bonds Issued at Par Value

    • Next, it generally pays interest during the term of the bond.
    • Finally, it pays off the obligation by repaying the face amount and the last interest payment.
    • When the bond is issued, the company must record a liability called "bond payable. " This is generally a long-term liability.
    • Bond Interest Expense - debit interest payment (increase interest expense line)
    • First, it must record any final interest payments that are made.

  • Times Interest Earned Ratio

    • Times Interest Earned Ratio = (EBIT or EBITDA) / (Required Interest Payments), and is indicative of a company's financial strength.
    • The Times Interest Earned Ratio indicates the ability of a company to meet its required interest payments , and is calculated as:
    • The Times Interest Earned Ratio is used by financial analysts to assess a company's ability to pay its required interest payments.
    • If Company A's EBIT is 750,000 and its required interest payments are 150,000, itsTimes Interest Earned Ratio would be 5.
    • If a company's Times Interest Earned Ratio falls below 1, the company will have to fund its required interest payments with cash on hand or borrow more funds to cover the payments.

  • Bonds Payable and Interest Expense

    • Valley made the required interest and principal payments when due.
    • To record periodic interest payment.
    • The income statement for each of the 10 years (2010-2018) would show Bond Interest Expense of USD 12,000 (USD 6,000 X 2); the balance sheet at the end of each of the years (2010-2018) would report bonds payable of USD 100,000 in long-term liabilities.
    • Each year Valley would make similar entries for the semiannual payments and the year-end accrued interest.
    • Summarize how a company would record the original issue of the bond and the subsequent interest payments

  • Activities of the Business: Financing, Investing, and Operating

    • Operating activities, or the fundamental activities the business engages in can include the production, sales, and delivery of the company's product as well as collecting payment from its customers.
    • Interest payments (alternatively, this can be reported under financing activities in IAS 7 and US GAAP)
    • Non-operating cash flows include borrowings, the issuance or purchase of stock, asset sales, dividend payments, and other investment activity.
    • Investing activities include purchases or sales of an asset (assets can be land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, payments related to mergers and acquisitions, and dividends received.
    • Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities.