key term - 1/10, n/30

Definition

1/10, n/30 is a term used in the context of comparing and contrasting merchandising versus service activities and transactions. It refers to a common payment term or credit arrangement where a customer pays 1/10 of the total amount due within 10 days to receive a discount, and the remaining n/30 (where n is the balance) is due within 30 days of the transaction date.

5 Must Know Facts For Your Next Test

1. The 1/10, n/30 term is a type of cash discount, where the customer receives a 10% discount on the total amount due if they pay within 10 days of the transaction date.
2. The remaining n/30 balance (where n is the unpaid amount) is then due in full within 30 days of the transaction date, without any additional discount.
3. This credit arrangement is commonly used in merchandising activities, where businesses offer incentives for prompt payment to improve cash flow and reduce the risk of customer default.
4. In contrast, service-based businesses may not offer the same types of cash discounts, as their revenue is primarily derived from the provision of intangible services rather than the sale of physical goods.
5. The 1/10, n/30 term is an example of a short-term credit arrangement, as the full balance is due within 30 days, unlike longer-term financing options.

Review Questions

• Explain how the 1/10, n/30 term is used to incentivize prompt payment in merchandising activities.
  • The 1/10, n/30 term is a common credit arrangement used in merchandising activities to encourage customers to pay their invoices quickly. By offering a 10% discount on the total amount due if the customer pays within 10 days, businesses can improve their cash flow and reduce the risk of customer default. The remaining balance (n/30) is then due in full within 30 days, without any additional discounts. This type of short-term credit arrangement is designed to provide an incentive for customers to pay their bills on time, which is particularly important for businesses that rely on the timely collection of accounts receivable to maintain their operations.
• Contrast the use of the 1/10, n/30 term in merchandising activities versus service-based businesses.
  • While the 1/10, n/30 term is commonly used in merchandising activities to incentivize prompt payment, service-based businesses may not offer the same types of cash discounts. This is because the revenue for service-based businesses is primarily derived from the provision of intangible services, rather than the sale of physical goods. In a service-based model, the business may not have the same need to improve cash flow or reduce the risk of customer default, as their revenue is not as dependent on the timely collection of accounts receivable. As a result, service-based businesses may have different credit terms and payment arrangements that are more tailored to their specific business model and customer needs.
• Evaluate the potential benefits and drawbacks of the 1/10, n/30 term for both the business and the customer.
  • The 1/10, n/30 term can provide benefits for both the business and the customer, but it also comes with potential drawbacks. For the business, the 1/10, n/30 term can help improve cash flow by incentivizing prompt payment and reducing the risk of customer default. The 10% discount offered for early payment can also make the business's products or services more attractive to customers. However, the business may also forgo some revenue by offering the discount, and they may need to carefully manage their accounts receivable to ensure timely collection of the remaining balance. For the customer, the 1/10, n/30 term can provide a financial incentive to pay their invoices quickly, which can help them maintain a good credit standing and potentially secure better terms in the future. However, the customer may also need to carefully manage their own cash flow to ensure they can take advantage of the discount, and they may be subject to late fees or other penalties if they fail to pay the remaining balance within the 30-day period.

Related terms

Merchandising Activities: Business operations that involve the purchase and resale of goods or products, typically in a retail setting.

Service Activities: Business operations that involve the provision of intangible services rather than the sale of physical goods.

Credit Terms:

The agreed-upon conditions for extending credit to a customer, including the payment due date, any discounts offered, and the consequences of late or non-payment.