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Questions and Answers
What does 'n' represent in the credit terms equation n/10 = EOM?
What does 'n' represent in the credit terms equation n/10 = EOM?
What is the meaning of EOM in credit terms?
What is the meaning of EOM in credit terms?
What is the main purpose of FOB in a transaction?
What is the main purpose of FOB in a transaction?
What is the difference between FOB shipping point and FOB destination?
What is the difference between FOB shipping point and FOB destination?
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What happens to the goods when they reach the FOB shipping point?
What happens to the goods when they reach the FOB shipping point?
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Who bears the risk of damage/loss during transit when FOB destination is used?
Who bears the risk of damage/loss during transit when FOB destination is used?
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What is the purpose of credit terms in a transaction?
What is the purpose of credit terms in a transaction?
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What is the discount period in credit terms?
What is the discount period in credit terms?
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What is the name of the account that is credited when recording shrinkage of merchandise inventory?
What is the name of the account that is credited when recording shrinkage of merchandise inventory?
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What is the purpose of offering a cash discount when the credit period is long?
What is the purpose of offering a cash discount when the credit period is long?
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Why do companies offer cash discounts to their customers?
Why do companies offer cash discounts to their customers?
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What is the term for the time period that can pass before a customer's payment becomes due?
What is the term for the time period that can pass before a customer's payment becomes due?
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In the equation n/10 = EOM, what does the 'n' represent?
In the equation n/10 = EOM, what does the 'n' represent?
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What type of expense is Cost of Goods Sold on the Income statement?
What type of expense is Cost of Goods Sold on the Income statement?
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What type of inventory system is used when a journal entry is recorded for each purchase and sale of merchandise?
What type of inventory system is used when a journal entry is recorded for each purchase and sale of merchandise?
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What is the term for the listing of the amounts and timing of payments between a buyer and a seller, and the discount percent if the payment is made within a certain time period?
What is the term for the listing of the amounts and timing of payments between a buyer and a seller, and the discount percent if the payment is made within a certain time period?
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What is the name of the account that is debited when recording shrinkage of merchandise inventory?
What is the name of the account that is debited when recording shrinkage of merchandise inventory?
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What is the purpose of offering cash discounts on sales?
What is the purpose of offering cash discounts on sales?
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What is the journal entry to record a cash refund on inventory bought due to defectiveness?
What is the journal entry to record a cash refund on inventory bought due to defectiveness?
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What is the term for goods that a company acquires for the purpose of reselling them to customers?
What is the term for goods that a company acquires for the purpose of reselling them to customers?
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If a seller offers terms of 2/10 n30 days, what does it mean?
If a seller offers terms of 2/10 n30 days, what does it mean?
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Why do companies prefer to offer cash discounts instead of cash refunds?
Why do companies prefer to offer cash discounts instead of cash refunds?
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In a perpetual inventory system, what is the account debited when merchandise is purchased on credit?
In a perpetual inventory system, what is the account debited when merchandise is purchased on credit?
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What is the purpose of credit terms in a business transaction?
What is the purpose of credit terms in a business transaction?
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Study Notes
Credit Terms
- Credit terms are a listing of the amounts and timing of payments between a buyer and a seller, and the discount percent if the payment is made within a certain time period.
- The equation for setting up the terms is: n/10 = EOM, where EOM means “end of month” and most invoices are due for payment in 30 days, thus making the EOM 30 days.
- The “n” in this case means the discount percent if the payment is made within 10 days.
Discount Period
- The discount period is the time period in which a cash discount is available and a reduced payment can be made by the buyer, taking advantage of a reduction in selling price.
FOB (Free on Board)
- FOB is an abbreviation for Free on Board and is used to describe credit terms for transactions of merchandise purchases on credit.
- The buyer and seller must reach an agreement on who is responsible for paying any freight costs and who bears the risk of loss during transit when the merchandise is being shipped.
- FOB shipping point: the buyer accepts ownership at the seller’s place of business, pays shipping costs, and bears ownership and risks of damage/loss when the goods are in transit or in transport.
- FOB destination: ownership of the goods transfers to the buyer when goods are delivered at the buyer’s place of business, with the seller paying shipping costs and bearing the risk of damage/loss while in transit/transport.
Purchase Discounts
- Merchandise bought on credit requires a clear statement of expected amounts and dates of future payments as well as terms of credit.
- A seller offering a cash discount when the credit period is long is encouraging the buyer to make prompt payment, which the buyer views as a purchase discount and the seller views as a sales discount.
Cash Discounts
- Companies giving cash discounts to their customers recognize these discounts as ‘Sales discounts’ on their books.
- Cash discounts are offered to increase customer walk-ins, increase sales during recessions or holiday sales, and to reduce the time needed to pay suppliers for merchandise.
Cost of Goods Sold
- Merchandise is referred to as goods that a company acquires for the purpose of reselling them to customers.
- The cost of this merchandise is called Cost of goods sold and is a direct expense item on the Income statement.
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Description
Learn about credit terms, including the equation for setting up terms, discount periods, and payment timing between buyers and sellers.